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Overvalued or More Upside Following Nvidia Partnership & KLCI Inclusion?

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This could be Malaysia’s darling stock right now.

Reminiscent of the glove stock hype during the onset of COVID-19, another stock is taking center stage as of today.

Source: Google Finance

Enter YTL Power International Berhad (KLSE: YTLPOWR), whose stock price has surged by almost 400% in the past 1 year.

Yet, when zooming out and looking at a 5-year timeframe, YTLPOWR was largely flat, with minimal appreciation in terms of share price. So is this a diamond in the rough that just got discovered?

Source: Google Finance

And now with the NVIDIA partnership and its inclusion into the KLCI, is there more upside?

YTL Power’s Business Model

YTL Power International Berhad is a multi-utility owner and operator, active across key segments of the utility industry. The key reporting segments in the group are Power Generation, Water & Sewerage, Telecommunications, and Investment Holding Activities.

It counts Singapore as its key geographic region, contributing the bulk of its revenue. The UK is also an important region. As a Malaysian company, only 3% of its revenue was derived from its home country in the latest FY 2023.

Source: YTLPOWR FY 2023 Annual Report

YTL Power owns a 100% equity interest in YTL PowerSeraya which retails generated energy under the Geneco brand, a name most Singaporeans are familiar with. YTL PowerSeraya has a licensed generation capacity of 3,100 MW, consisting of combined-cycle plants, cogeneration combined-cycle plants, and steam turbine plants.

YTL PowerSeraya generates power mostly via natural gas.

The power generation and retailing business contributes to the bulk of YTL Power’s business. The water & sewerage business, although second largest in terms of revenue, was loss-making, together with the telecommunications business.

YTL Power’s Financial Positions

Being a company that runs an infrastructure business, before even prying into the balance sheet, I guessed that YTL Power will hold significant long-term assets under their books or have it leased to them on a long-term basis.

From the historical snapshot, my guess has been proven right; approximately 60+% of YTL Power’s total assets are property, plant, equipment, and goodwill.

Because YTL Power owns YTL PowerSeraya and Wessex Water, the UK water & sewerage business under equity interest, assets under these businesses are considered valued cash-generating units under goodwill valuation methods, which are parked under the intangible assets group.

YTL Power’s Top and Bottom Lines

Next, let’s take a look at the top and bottom lines of YTL Power.

YTL Power’s top and bottom lines have been relatively stable, save for an outperformance in FY 2023 and LTM.

While it is true that energy prices have been on the rise for the past 2 years (we’ve seen the bills ourselves!), the weakening Ringgit has also helped to lift YTL Power’s performances!

The majority of the company’s top and bottom line comes from its equity interest in YTL PowerSeraya, where revenue and profits are in Singapore Dollars! And we all know how the SGD has performed against the MYR in the last 2 years!

On top of that, hats off to the company for increasing its market share, rising from 13.9% in 2022 to 15.6% in 1H 2023.

Source: ema.gov.sg

The infrastructure business can also be notoriously CAPEX intensive. Comparing YTL Power’s operating cash flow against its capital expenditures, CAPEX numbers are higher than the cash generated from the business in most periods.

This explains why free cash flow margins are consistently below 0, save for FY 2023.

Operating efficiencies

This got me thinking – how efficient is YTL Power’s power generation business against other companies in the power generating business?

To just look at 2 competitors on an equal ground comparison, I compared YTL Power against Tenaga Nasional Berhad (KLSE: TENAGA), Malaysia’s national electricity grid provider, and China Yangtze Power Co., Ltd. (SHA: 600900).

Even though all 3 companies are in the power generating business, they are not identically the same – from modes of electricity generation to market share and customer pool. But still, it would provide a yardstick on how profitable power generation businesses should be.

China Yangtze turned out to be on top, generating more returns on assets against Tenaga Nasional Berhad (TNB) and YTL Power. With the strengthening Ringgit, YTL Power also looks set to overtake TNB in the ROA performance.

More upside?

Looking at the steady climb in share price over the last year, one can justify that fundamental improvements helped the share price climb in 2023.

But that does not explain the sharp spike during the end Dec 2023 / early Jan 2024.

Source: Reuters

YTL Power does have a data center vertical that could potentially take center stage, if the partnership with NVIDIA kicks off and runs smoothly. The data center business is a lucrative and proven model – with plenty of US companies and REITs achieving billion-dollar valuations in this sector.

This move could firstly, transform YTL Power from a pure play energy generation business to a full-fledged infrastructure company, while also improving its margins, and eventually cash flow generability.

But the quantum of how much improvements and potential remains vague, safe for the substantial USD 4.3 billion project price tag. To give a bit of perspective, YTL Power has around USD 12.5 billion worth of assets and made USD 5 billion in revenue over the last 12 months.

My thoughts

I have a love-hate relationship when it comes to infrastructure business.

A good infrastructure business can be a mean cash cow-generating machine. The business model is evergreen, and hitting a certain size means attaining a certain competitive advantage.

This is why I like Bershire Hathaway Inc.’s BNSF Railway – the largest freight railroad in the US, as well as the data centers owned, utilized, and managed by the Magnificent Sevens.

The intensive CAPEX requirements to reach the size to go head to head is practically suicidal. Even though the data center scene still boasts many constituents and players, I predict that there will be consolidation 10-20 years down the road.

Moving to the more fragmented part of the infrastructure business, like energy generation and telco services, there is no loyalty other than to the cheapest price. Energy generation is tough, as companies need to undergo multiple hedges in terms of cash flow hedges, feedstock and selling price.

Hedging if not properly executed, can cripple an infrastructure business. Of all categories, the energy-generating business is the most susceptible to these risks.

The share price is also identical and reminiscent of the glove stock frenzy during the COVID period.

The company might be heading in the right direction with the NVIDIA partnership.

But I tend to stay on the side after seeing prices go up so high in a drastic manner. I see potential, but the margin of safety from a valuation point of view is thinning.

Perhaps the saving grace is that being included as a KLCI component, prices should be more stable and have even more upside?

What say you?



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