YTL POWER (6742): Currently yielding lucrative returns, how will the future growth story continue? | Moomoo Research

As of August 22, YTL Power has a current market capitalization of MYR 346.26 and a dividend yield of 1.4%. Its stock price has risen by 66% year-to-date, providing investors with lucrative returns. So, is YTL Power still a good buy? And what is its investment value? Let's analyze it step by step.

YTL Power International Bhd (KL:YTLPOWR) reported a 5.6% decrease in net profit in the fourth quarter (4QFY2024) ending June 30, 2024, dropping from MYR 1.14 billion in the previous year to MYR 1.07 billion. This was mainly attributed to reduced contributions from its power generation and investment holding businesses.

Consequently, earnings per share (EPS) for the quarter decreased to 13.16 sen, down from 14.02 sen for the same period in the previous year.

Revenue for the quarter also declined to MYR 6.34 billion, a 10.5% decrease from MYR 7.09 billion in the same period the previous year.

YTL Power announced a second interim dividend of 4 sen per share for the financial year ending June 30, 2024, payable on November 29. This brings the total dividends declared for FY2024 to 7 sen per share.

Despite this, the group concluded FY2024 on a positive note, with a net profit of MYR 3.46 billion, representing a 70.8% increase from MYR 2.03 billion in the previous year. This growth was primarily attributed to strong performance in the power generation sector, improved profit margins, reduced interest expenses after loan repayments, and the appreciation of the Singapore dollar against the Malaysian ringgit.

Revenue for FY2024 increased by 2%, rising from MYR 21.89 billion in the previous year to MYR 22.32 billion.

First, let's take a look at YTL Power's balance sheet, which indicates that it is a capital-intensive enterprise highly reliant on external financing. The substantial amount of goodwill and other intangible assets suggests that the company has achieved growth through mergers and acquisitions.

From these figures, we can see that YTL Power has substantial non-current assets, especially the MYR 30.9 billion net property, plant, and equipment, indicating significant investments in infrastructure, aligning with its utility company business nature. The MYR 9.515 billion goodwill and other intangible assets further signify the company's expansion through mergers and acquisitions.

In terms of liabilities, the long-term borrowings and lease liabilities amount to MYR 29.675 billion, representing a significant portion of non-current liabilities, indicating that the company has undertaken substantial financing to support long-term growth and capital expenditures.

From a financial risk perspective, the company's current assets (MYR 14.246 billion) significantly exceed its current liabilities (MYR 7.088 billion), indicating strong short-term debt servicing ability. However, the high proportion of non-current liabilities, particularly the MYR 29.675 billion long-term borrowings and lease liabilities, suggests that the company needs consistent and stable cash flows to fulfill its long-term debt obligations.

YTL Power's financial structure indicates significant investments in infrastructure and long-term development, aligning with its strategic positioning as a utility company. However, this reliance on external financing also implies that the company needs to ensure continuous cash flow and profitability in the future to manage long-term debt pressures.

Diversified business operations:YTL Power's business extends beyond power generation and includes water and sewage treatment, telecommunications, data centers, and solar power generation, among other areas. This diversified business structure helps the company maintain stable sources of income in different market environments.

The power generation business is the largest revenue contributor. According to the FY2023 financial report, the power generation business generated MYR 16.217 billion in revenue, accounting for 74.08% of the total revenue. In terms of geographical breakdown, Singapore serves as the main revenue stronghold, contributing MYR 16.279 billion, or 74.37% of the total revenue.

Looking at the recent financial performance, YTL Power's net profit decreased by 5.6% in the fourth quarter of 2024, primarily due to reduced contributions from power generation and investment holding business segments. However, the net profit for the entire fiscal year (FY2024) saw a growth of 70.8%, attributed to better performance in the power generation segment, including improved profit margins, reduced interest expenses after loan repayments, and the appreciation of the Singapore dollar against the Malaysian Ringgit.

Considering the company's business model and management's operational plans, the profitability of the Singapore power market significantly impacts the company's overall financial performance.

Furthermore, exchange rate fluctuations are crucial factors influencing revenue. For instance, this fiscal quarter, while the appreciation of the Singapore dollar against the Malaysian Ringgit may have a positive impact on some revenues, it may not entirely offset the negative effects of declining electricity pool prices.

Therefore, predicting YTL Power's revenue performance requiresan assessment of factors such as the company's capacity and future expansion plans, market supply and demand dynamics, competitive landscape, electricity wholesale prices, and operating costs (fuel costs being a significant cost for power generation, especially for thermal power plants).

Company's capacity and future expansion plans:

The company is expanding its power generation capacity, with YTL PowerSeraya planning to develop a new 600-megawatt CCGT power plant by the end of 2027.

The company is transitioning towards renewable energy, with plans to develop a large-scale solar power facility in most of the Kulai Young Estate area.

As of 2023, YTL Power, as Malaysia's first independent power producer (IPP), operates in Singapore, Indonesia, and Jordan, making it a major player in the region's power generation industry, with a total gross generation capacity of approximately 4.8 gigawatts (GW). This indicates that YTL Power's capacity is expected to grow at an annualized rate of around 3.125% until 2027.

In summary, for YTL Power, thermal power generation (primarily gas and coal) accounts for most of YTL Power's power generation capacity, with the addition of green energy being relatively small in proportion and impact. The recent increase in gross profit mainly stems from cost reductions, so for future profitability, it is crucial to monitor the costs of coal and gas.

YTL Power is unlikely to return all cash to shareholders as the company will require significant capital expenditure to meet future needs. As YTL Power continues to pursue profitable new projects such as building solar power plants and data centers, these cash reserves will be put to use.

Therefore, investing in YTL currently depends on the potential for future growth to raise overall valuation. However, the company's main business of thermal power generation is highly cyclical and the other businesses that are being developed to fill the gap are not yet significant enough to offer large investment opportunities. As a result, the current valuation is mostly complete and significant investment opportunities are not apparent.