The Giant Remains in the Game

HLB, April 24, 2024

YTL Corporation 
Target Price: RM3.33
YTL has performed momentously with strong earnings delivery since our initial report in Sep-23. We believe YTL remains undervalued with strong potential upside, leveraging onto key catalysts from (i) utilities (YTLP) – sustaining SerayaPower & APCO earnings, turnaround of Wessex and new growth from DC development; (ii) construction – from both external (including HSR and MRT3) and internal projects (e.g. data centre and LSS); and (iii) cement (continued strong demand from current projects and upcoming mega projects in the pipeline). We derive a fair value of RM3.33 (from RM2.10) on YTL based on 20% discount to SOP: RM4.17, with further potential upside.

Strong delivery. Since our first report in Sep-2023, YTL has delivered strong earnings performance in recent quarters with share price run-up above our initial fair value. After recent management updates, we remain upbeat on YTL’s outlook and we have revised upwards our fair value to RM3.33 (from RM2.10) based on Sum-of-Parts valuation.

Strong leverage to YTLP. 55.6% owned YTLP continues to deliver strong earnings over the past few quarters, backed mainly by PowerSeraya as Singapore retail electricity prices remained stable (given the ongoing tight demand-supply situation) along with the relatively stable gas prices (benchmark to Brent crude oil) – management expects margins to remain strong in coming years. Jordan APCO’s contribution has also been stable at RM70-80m/quarter since commencement in 1QFY24 and is expected to rise yearly as debts are pared down over the years. UK WessexWater is expected to turnaround in 4QFY24 and FY25 (due to slowing inflationary pressure and average tariff hikes of 12-13% effective Apr-24) with further earnings growth in FY26 (driven by higher allowable returns and Regulated Asset Size on higher capex spending under new Regulatory Period 2025-2030). Hence, we are convinced that YTL’s Utilities segmental earnings will continue to grow in coming years. At the meantime, management continued to embark on its strategies on new business segments for future growth:

i) YTLDC – a 500MW capacity of green data centre plan over 10 years (depending on demand). We understand the first phase of the planned 48MW DC1 (mainly for Shopee) will begin contributing in 4QFY24. YTLDC has also started construction for DC2 (estimated 100MW) for AI cloud infrastructure (under YTLCom) and is working on next DCs in the pipeline (potentially 100MW each) for potential clients. When the segment matures, the earnings contribution could be in the tune of billions and we do not discount potential monetisation of the assets.

ii) AI-DC – estimated 100MW, collaborating with NVidia for technology and support (under YTLCom). We understand the first stage will be utilizing NVidia’s H100 chipsets and the subsequent stage will be utilizing NVidia recently launched GB200 chipsets. We understand that YTL will be one of first deployment of GB200 globally (given priority by NVidia), thereby resulting strong demand for YTL’s AI infrastructure. Given YTL’s strong balance sheet, we reckon it could become NVidia’s go to partner for ASEAN expansion.

iii) RE ventures – 500MW LSS to support YTLDC’s green powered capacity with further growth opportunities for potential RE export growth. Up to 122.5MW WTE to be co-developed with KDEB.

Construction pick up. YTL’s ~RM1bn construction orderbook continues to see potential for near term work orders from: (i) progress on its green data centre spearheaded by the 100MW AI data centre; (ii) PMC for 600MW SG hydrogen-ready CCGT secured by YTLP; (iii) 500MW data centre solar farm; (iv) WTE plant; and (v) flood mitigation/hotel projects. Other potential sizable jobs could come from KL-SG HSR (reportedly shortlisted) and MRT3 rollout remains a possibility. While the construction business is synergistic to the overall group, it is not a key earnings driver contributing a mere 1-2% to total PBT across our forecast horizon.

Cement. Segmental profitability is expected to sustain in the near term on the back of favourable coal cost dynamics while cement ASPs remain healthy at RM380/t. Indonesia’s approved coal production quota for 2024 points towards continuing easy conditions (+29.9% vs initial 2024 target; +19.6% YoY) as projected supply continues to outstrip demand. Nevertheless, we reckon current prices are not reflective of Indonesia’s intended supply growth yet as production YTD (as at 15-Apr) has lagged at 199m tonnes or 21.6% of target due to heavy rain in critical regions during Jan-Feb period. Adherence to these targets would mean that coal ASPs could turn softer starting mid-24. On the demand side, we expect gradual uptick in volumes from ongoing construction projects, notably ECRL while pipeline of mega projects in MY & SG such as Penang LRT, MRT3, HSR, Changi T5 and Tuas Port firms up demand prospects longer term.

Forecast. YTL reported core PATMI growth of +23.7x in FY23. We expect continued growth momentum in FY24f (+67.0% YoY), FY25f (+14.4% YoY) and FY26f (+6.1% YoY), driven by earnings sustainability of PowerSeraya and APCO with earnings growth from WessexWater, construction and cement segments. Note that we have not accounted for the earnings contribution from DC segments (sizeably to the tune of billions), which could start contribution in FY25-26.

Fair value of RM3.33. We derive a fair value of RM3.33 (from RM2.10) on YTL based on 20% discount to SOP: RM4.17, with further potential upside. YTL has strong catalysts from: (i) strong earnings momentum (driven by Utilities segment); (ii) strong cash flow and dividend payout; (iii) leverage to mega infrastructure projects; and (iv) new ventures into DC and RE segments for the group’s next stage of growth.