KUALA LUMPUR: Hong Leong Investment Bank (HLIB Research) is still optimistic about YTL Power International Bhd's prospects, which are supported by profit sustainability over the next three years.
HLIB Research said in a note today that YTL Power's management had guided the Singapore subsidiary's strong performance to be sustainable for the next three years, owing to the market's tight power generation capacity condition as well as the end of take-or-pay liquefied natural gas (LNG) contracts for the entire market in 2022.
It said that this includes long-term low-cost LNG supply contracts, an increase in the percentage of renewed retail energy sales contracts with higher rates, and a new contribution from the Tuaspring combination cycle gas turbine (CCGT).
"In the third quarter ended March 31, 2023 (3Q23), the subsidiary reported a historical high quarterly profit before tax of RM806.4 million with a margin of 19.6 per cent.
"With the on-going heatwave across the country and the increasing renewal of retail contracts, we expect a stronger performance in the coming quarter," it added.
To recap, YTL reported a record quarterly core profit after taxation and minority interests (PATMI) in 3Q23 at RM477.8 million, and accelerated the cumulative nine-month period (9MFY23) to RM984.9 million.
The strong performance was mainly driven by the Singapore PowerSeraya subsidiary, which realised higher average retail electricity tariffs on a higher percentage of renewed contract rates and an increase in market rates while fuel gas costs stayed low.
HLIB Research noted that PowerSeraya has been recording increasing quarterly earnings since 2Q22, following tighter power market conditions in Singapore, higher retail prices, and secured long-term cheap LNG contracts.
It said the group's wholly-owned subsidiary, Wessex Water, is expected to turnaround in the coming quarters following the effective nine per cent tariff hike in April 2023.
While its joint venture company, JV Attarat Power, is expected to start contributing in 4Q23 and 1Q24,
HLIB Research has maintained its earnings forecast for YTL Power, but it does discount a stronger performance in 4Q23.
The investment bank has reiterated its "Buy" recommendation on the stock, with an unchanged target price of RM2.05.
"We believe the current valuation is undemanding, while earnings and dividends may surprise on the upside," it noted.