KUALA LUMPUR (Oct 4): RHB Research has revised its earnings projections for YTL Power International Bhd (KL:YTLPOWR) for the fiscal years 2025 to 2027, reducing them by 5% to 6% due to a stronger ringgit, according to its note on Friday.

This adjustment comes as the ringgit continues to appreciate against the US dollar and the Singapore dollar, as well as the British pound, currencies in which PowerSeraya and Wessex Water predominantly operate.

Consequently, the sum-of-parts-based target price for YTL Power was lowered from RM5.94 to RM5.68, said RHB, which kept its “buy” call on the stock.

The stronger ringgit is expected to affect revenue from PowerSeraya and Wessex Water, which are major contributors to YTL Power's income and primarily operate in the Singapore dollar and British pound.

Increased exposure to the US dollar is also likely, due to upcoming commercialisation of YTL Power's artificial intelligence data centre (AI-DC).

"PowerSeraya’s and Wessex Water’s revenue accounted for 68% and 23% of total revenue in FY2024.

"Both of these businesses are denominated in SGD and GBP. Going forward, we estimate these two businesses to continue contributing a significant portion to YTLP’s topline but the group could likely see higher revenue exposure in USD when the AI-DC revenue is recognised," said RHB.

For PowerSeraya, gas feedstock — a major cost component — is priced in the US dollar, while most of Wessex Water's costs are in the British pound.

Meanwhile, associate profits from YTL Power's Jordan and Indonesia power plant projects and interest income from shareholder loans to its Jordan associate are also in the US dollar.

"Additionally, colocation services revenue will be either in MYR and USD depending on clients but cost is largely denominated in MYR. AI-DC’s revenue and cost are likely to be denominated in USD," it added.

RHB Research maintained a positive outlook on YTL Power's long-term earnings potential, especially from the AI-DC development, noting its "undemanding valuation" at 10 times FY2026F price-to-earnings ratio, below the five-year mean of 12 times.

Meanwhile, RHB noted that a recent 50 basis points cut in the US Federal Funds Rate (FFR) has already led to a weaker US dollar, which decreased by 6% quarter-on-quarter against the ringgit in the third quarter of 2024.

RHB Economics has forecasted an additional 100 basis points cut in the US FFR in 2024, followed by another 100 basis points cut in 2025.

In contrast, Bank Negara Malaysia's overnight policy rate is expected to remain unchanged. The anticipated US FFR cuts in the fourth quarter of 2024 are likely to prompt similar rate reductions in key developed and emerging markets, which will directly affect currency exchange rates.

Specifically, the European Central Bank and Bank of England are expected to reduce rates by 25 basis points in December 2024.

YTL Power shares were unchanged at Friday’s opening bell at RM3.57, valuing the utilities group at RM29.5 billion.