PETALING JAYA: YTL Power International Bhd
’s subsidiary Wessex Water Services Ltd will likely return to profitability following an increase in water tariff to be imposed from April 1.
According to CGS International Research (CGSI), Wessex will impose an 11% increase to water bills of its customers as part of its approved annual water tariff adjustments.
“We estimate the tariff revision translates into an increase of at least RM95mil in quarterly revenue for Wessex, all else remaining equal.
“This, in our view, should translate into improved earnings for Wessex and could pave the way for its return to profitability as early as third quarter ending March 31, 2024 (3Q24),” the research house said.
Wessex explained, in its announcement, that it deliberately kept tariff increases lower than anticipated during last year’s review to alleviate the immediate financial strain on its customers amid the cost-of living crisis in the UK.
This year’s adjustment serves, in part, as a recovery for the under-collection between April 2023 and March 2024.
CGSI said another key re-rating catalyst for YTL Power is securing off-takers for the Nvidia data centre (DC) and colocation facilities at attractive rates.
The research house added that phase one of YTL Power’s DC is progressing well, with the co-locator expected to complete fit-out works for eight megawatt (MW) out of the 32MW firm capacity by end of the first quarter.
“While finer details on the DC projects are still lacking, our initial calculations suggest that these planned DC investments can contribute as much as RM1.2bil to RM1.4bil in net profit to YTL Power once fully ramped up in FY27,” it said.
CGSI said it is a good time to accumulate the stock after succumbing to selling pressure recently, with the stock down 12% since Feb 27, despite experiencing positive operational developments.
“While the shares were up strongly over the past 12 months (356%), we believe the potential value accretion from the DC investments have yet to be fully priced in.
“As such, we reiterate ‘add’ on YTL Power with an unchanged sum-of-parts-based target price of RM4.50.
“The current share price implies an FY24/25 price over earnings of circa nine to 10 times on an earnings base that reflects a normalisation of PowerSeraya earnings by FY26,” the research house added.
