YTL Power correction overdone on earnings upside

KUALA LUMPUR: YTL Power International Bhd's recent share price correction may be excessive, as stronger electricity margins in Singapore are expected to cushion the impact of gas supply disruptions from Indonesia, while its data centre and power generation expansion offer further earnings upside.

CGS International Securities Malaysia Sdn Bhd said the group's share price had fallen 21 per cent since end-September 2026, compared with a three per cent decline in the FBM KLCI, wiping out approximately RM10.7 billion in market capitalisation.

The sell-off was driven by concerns over global data centre investments, gas supply curtailments and scrutiny surrounding Nvidia and the artificial intelligence (AI) chip supply chain.

However, CGS International maintained its "Add" call on YTL Power with an unchanged target price of RM6.50, representing a potential upside of 38.6 per cent from its current price of RM4.69.

The research firm said market concerns surrounding YTL Power's AI data centre ambitions had overshadowed the resilience of its existing colocation data centre business, which formed the basis of its valuation.

It added that its target price did not attribute material value to the group's AI data centre plans, suggesting further upside could emerge if these initiatives materialised.

Near-term earnings could also benefit from stronger electricity margins at its Singapore-based PowerSeraya operations.

The firm said Singapore's average spark spreads, which measure the profitability of generating electricity from natural gas, increased to S$135 per megawatt-hour (MWh) between August and October 2026, compared with S$35 per MWh in the first half of 2026.

This was supported by higher pool electricity prices, with the Uniform Singapore Energy Price averaging S$365 per MWh in October, against S$164 per MWh in the first half of the year.

"Although only about ten per cent of volumes are exposed to spot prices, we estimate wider spreads at an assumed average of S$100 per MWh can add RM35 million to quarterly earnings, equivalent to about eight per cent of the group's fourth-quarter financial year 2026 (Q4 FY26) net profit.

"This should support an earnings uplift in the first half of FY27, alongside higher quarter-on-quarter volumes, following maintenance shutdowns in the first half of 2026," the firm added.

The stronger margins are additionally expected to help offset the potential RM38 million earnings impact from Indonesia's gas supply curtailment to Singapore in the second quarter of financial year 2027.

Indonesia accounts for approximately 30 per cent of PowerSeraya's gas supply, although CGS International expects the impact to remain manageable, assuming the affected volumes are replaced with liquefied natural gas at prevailing spot prices.

The research firm also noted that bulk retail contract renewals in early 2027 could provide an opportunity for PowerSeraya to reprice its contracts and mitigate sustained cost pressures.

Beyond its electricity generation business, CGS International highlighted additional growth potential from YTL Power's reserved gas turbines, which could support approximately 5.25 gigawatts (GW) of generation capacity.

It estimated that a 1.4GW combined-cycle gas turbine plant could generate between RM200 million and RM250 million in annual net profit.

If all seven reserved turbines are deployed, the potential earnings contribution could reach RM750 million to RM950 million at project level.

CGS International's current valuation incorporates only the first three turbines, valued at RM3.2 billion, excluding the remaining four units and leaving room for further upside.

For its data centre business, the research firm said its valuation assumed only 850 megawatts of capacity, significantly below YTL Power's 2.4GW target pipeline.

It said new colocation data centre contracts, combined-cycle gas turbine project wins and sustained electricity margins in Singapore would be key catalysts for the group's share price.

However, downside risks include a slower data centre capacity ramp-up, weaker PowerSeraya margins and a resurgence in inflation in the United Kingdom.

"Following the release of its FY26 Annual Report and recent developments, we raise FY27 profit after tax and minority interests by 6.5 per cent, while leaving longer-term forecasts unchanged," the firm said.