YTL Power International: A Company with Balanced Future Performance Offensive and Defensive

YTL Power provides communities around the world with necessities such as electricity, clean water, efficient sewerage systems, and the latest communication services of the highest quality. As the company's official website puts it, its job is to ensure that the simple things you rely on to work every day, work.

Source: Company’s website

From the company's website, we can see that up to the end of 2023, YTL Power's business can be divided into four parts: Power Generation, Water & Sewerage, Telecommunications, and Investment Holding Activities.

The power and water segments are the traditional core businesses for this utility company, accounting for over 70% of its total revenue. Under the Telecommunications segment, Data Centers and Digital Banking are the company's emerging businesses, which are the main focus of YTL Power's digital transformation efforts to enhance its competitiveness.

The company’s operations are spread across multiple regions, primarily Singapore, the UK, and its home base in Malaysia. Among these, Singapore holds the highest revenue share, contributing 74% of the total revenue in 2023, followed by the UK with 20%.

1、YTL Power’s 9-Month Profit After Tax Grows 176% to RM2.4 Billion

According to the latest earnings update released on May 23rd, YTL Power's net profit after tax grew strongly over the past three quarters, increasing by nearly 200% year-on-year. Total revenue and pre-tax profit also saw growth to varying degrees. The rapid growth was attributed not only to the positive trends in core businesses but also significantly to the continued contribution from PowerSeraya.

PowerSeraya is an energy company based in Singapore and a wholly-owned subsidiary of YTL Power. It primarily engages in the procurement, storage, and supply of natural gas, providing electricity and thermal energy to the Singapore market. Currently, PowerSeraya holds a significant position in Singapore's energy market. With the increasing demand for energy in Singapore, PowerSeraya's financial performance has been robust and is expected to continue growing in the coming financial years. Additionally, the water and sewerage segment recorded higher revenue due to new contracts secured within the non-household retail market and the price increase allowed by the industry regulator.

2、Active Participation in Malaysia's AI Development

YTL Power is collaborating with global leading companies like NVIDIA and is expected to see significant revenue from FY25 onwards. YTL is already a leader in the AI field within the Malaysian market:

YTL Communications, the telecommunications arm of YTL Power, has partnered with Clarion Malaysia, a global automotive supplier specializing in in-vehicle infotainment (IVI) equipment, to launch Malaysia's first 5G-enabled advanced manufacturing line. This initiative uses 5G and AI technologies to drive industrial automation and intelligent manufacturing, contributing significantly to the nation's digital transformation goals.

Moreover, in light of the Malaysian government's intention to become a regional data center hub, YTL Power has confirmed a collaboration with NVIDIA, the American chip giant, to establish an AI infrastructure powered by NVIDIA technology. The data center involved in this project is expected to begin operations in the first half of this year. Once operational, this collaboration will significantly boost the company's revenue and core competitiveness.

3、YTLP acquired 31.42% of Ranhill's stock through its 70% stake in SIPP Power Sdn Bhd.

YTL Power, through its 70%-owned subsidiary SIPP Power Sdn Bhd, has acquired a 31.42% stake in Ranhill. This move is expected to strengthen YTL Power's capabilities in water treatment and large-scale solar projects, including water utilities in Johor, independent power plants (IPPs) in Sabah, and large-scale solar projects in Perak. While this may bring potential synergies, the short-term impact on earnings is expected to be minimal.

In 2023, YTL Power's EPS was RM0.25, which represents a year-on-year increase of 60.82%. For the company's future EPS, Bloomberg has given a consensus expectation of RM0.39/RM0.40 for FY24/FY25, while Hong Leong Investment Bank has provided an optimistic forecast of RM0.40/RM0.48, indicating an expected significant increase of nearly 80% in FY24 and continued growth in FY25. The main reasons include:

1、The strong performance of core businesses in the first three quarters of FY24, with increased electricity demand expected in regions like Singapore due to hotter weather conditions;

2、Attarat Power, a subsidiary of the group located in Jordan, has been contributing profits since 1QFY24. With the reduction of external loans, it is expected that profits will gradually increase in the coming years. Wessex Water, a subsidiary in the United Kingdom, benefited from the 12% tariff increase in April and the weakening impact of the United Kingdom inflation index, and is expected to achieve business improvement in 4QFY24.

3、Data centers and artificial intelligence are making good progress and are expected to deliver significant revenue and profit contributions starting in fiscal year 25.

On June 11, 2024, YTL Power announced a dividend of RM0.03 per share, which is slightly higher than the RM0.025 per share from the same period last year. However, compared to other utility companies in the market, the company's dividend yield of 1.19% is still relatively low. Historically, the company has maintained a high dividend payout ratio, typically disbursing dividends twice a year, although the overall dividend amount remains low.

Given the company's active business expansion into cutting-edge fields like data centers and AI, the high demand for R&D expenses and other needs slightly mitigates the disadvantage of its low dividend yield. We can keep an eye on the dividend situation during the next payout, as by then, various business segments are expected to have stabilized.

As of June 12, 2024, the company's stock price has risen by 26.4% due to favorable internal and external factors, with a year-to-date increase of 96.06%, significantly outperforming the Malaysian market.

Currently, the company's price-to-earnings ratio is 11.78x, which is lower than industry peers like Tenaga and PGas. Considering the strong performance of its core businesses and future growth potential, Hong Leong Investment Bank has set a target price of RM7.45, indicating there is still considerable upside for the company's stock.

However, analysts also caution about related risks, such as stringent ESG standards in developed markets, regulatory risks in Singapore's electricity industry, and the possibility that new data center businesses might not take off as expected.