Update 24 September on YTL Power

US stock markets closed at record highs last night as stocks extended their rate-cut rally. The US is on track for a healthy third quarter as the Atlanta Fed’s GDPNow tool tracks a 2.9% q-on-q GDP growth.

Nvidia share price rose slightly to US$116 last night. Nvidia has been on an absolute tear, rising 134.8% in 2024, 179.5% in the last 12 months, and a whopping 25,049% in the past decade. It has been a record-setting 2024 for the AI chip giant earlier this year, as Nvidia briefly became the largest company in the world before profit taking set in at the start of the month of September.

Valued at $2.85 trillion by market cap, Nvidia commands an 80% market share in AI chips. In fiscal Q2 of 2025 (ended in July), Nvidia reported revenue of $30 billion, an increase of 122% y-on-y. The company’s net income more than doubled to $16.67 billion, or $0.67 per share, in Q2 compared to $6.18 billion in the prior-year period.

Nvidia’s data centre business is the key driver of its top-line growth. This segment rose 154% to $26.3 billion in Q2, accounting for 88% of total sales and surpassing estimates of $25.24 billion. Nvidia generates most of its data centre sales from industry giants such as Microsoft, Meta, Amazon, Tesla and Alphabet, all of whom are investing heavily in the AI segment.

At 40.83 times forward adjusted earnings, Nvidia trades at a discount to its own five-year historical average valuation. Consensus forecasts call for EPS to more than double in fiscal 2025, with 40% adjusted EPS growth projected for fiscal 2026 - suggesting Nvidia stock is reasonably priced at current levels.

On September 11, Goldman Sachs analyst Toshiya Hari reiterated a conviction buy rating on Nvidia, with a 12-month target price of $135. Hari explained that companies will spend $1 trillion to build data centres in the upcoming decade, which would be a major driver for Nvidia. Further, improving efficiency rates for Nvidia customers should help the company maintain demand, as CEO Jensen Huang expects hyperscaler customers to generate $5 in rental revenue for every $1 spent on Nvidia infrastructure. Hari also emphasized that Nvidia’s competitive moat, large installed base of GPUs, and ability to integrate its hardware with software make it a compelling investment.

Analyst Atif Malik from Citi reiterated a Buy rating for Nvidia with a target price of $150, and Bank of America’s Vivek Arya also backed a “Buy” rating. The consensus on Nvidia is a “strong buy” overall among 40 analysts in coverage, with the average target price of $149.46 and the highest target price at $200.

Back in Bursa, YTL Power suffers similar fate of profit taking as in the case of Nvidia, despite the better-than-expected Q4 FY24 results. Analysts generally reduced the target price for YTL Power post Q4 result, citing reasons that PowerSeraya earnings have peaked and earnings contribution from the AI data centre may be delayed to FY2026. Some sell-side analysts are projecting an almost 50% reduction in PowerSeraya earnings from FY2024 levels in the coming quarters of FY2025, and are not projecting any earnings contribution from YTL Power’s data centre businesses in FY2025 at all by pushing it to FY2026 citing excuse that Nvidia Blackwell GPU delivery will be delayed.

We can see the change in shareholding mix of YTL Power which is being reflected in analysts’ calls on the stock. Foreign funds were buying big on YTL Power since 2023, having accumulated a total of RM880 million worth of YTLP shares in Jan-Dec 2023. Based on Maybank data, foreign funds held a total of 14% stakes in YTL Power as of 31 Dec 2023. That implied an average purchase price of RM0.77 for the RM880m worth of shares purchased in 2023. Foreign funds were seen chasing high YTL Power shares in Jan-April 2024 with a net purchase of RM750 million at its peak as of 30 April 2024. Maybank data shows that foreign funds holding in YTLP was at 14.5% as of 31 Mar 2024 and 30 June 2024, which is puzzling to me. Its monthly data shows that foreign funds’ net purchase in YTLP had declined to just RM60m as of 31 August 2024. If the average cost price for foreign funds’ purchase in YTLP in 2024 is about RM3.00 per share, then foreign funds should have bought additional RM750m/RM3.00 = 250 million shares of YTLP or additional 3% stakes, and their shareholdings should have been at about 17% as of 30 April 2024. Then after the selling of RM690m worth of YTL Power shares or estimated 150 million shares in May-August 2024, foreign funds’ holding in YTLP should have been reduced to 14.3% as of 31 August 2024.

Foreign funds continued selling YTL Power shares in September in small quantities - RM12m yesterday, <RM10m last Friday, RM6m last Thursday, RM11m last Tuesday, RM19m last Monday and RM18m on 10th September, RM19m on 6th September and RM9m on 3rd September. So that is about RM100m or 28 million shares sold in September so far. We can see that foreign funds having accumulated 1,140 million shares of YTLP in 2023 and another 250 million shares in Jan-April 2024, have sold only about 180 million shares so far since May 2024. They still hold substantial stakes of 14.5% or 1.2 billion shares of YTL Power as of yesterday.

We saw numerous upgrade reports from foreign research houses like CLSA (TP of RM4.40 on 24 Jan 2024, raised to RM5.10 on 17 April 2024), Nomura (TP of RM5.70 on 2nd May 2024) and Macquarie (TP of RM7.30 on 14th May 2024) in early 2024 up to May 2024, which coincided with the starting of selling by foreign funds. After foreign funds have sold off whatever holdings of YTLP they wanted to pare down, we now see foreign research house like JP Morgan to issue sell-side call with a target price of RM4.00 as published on 7th August 2024 when YTLP share price was trading at RM4.06. Hence I have reasons to believe that JP Morgan may be working for some foreign funds who seek to gain entry into YTL Power, as the share price slide down after the unfavourable draft determination of Ofwat for Wessex in mid July 2024. Then we saw negative news of MACC seeking information from YTL Comms in relation to the 1Bestarinet project in early September, that caused bigger damage to the share price.

On the other hand, as foreign funds sold down on YTLP in May-August 2024, local institutional funds were seen buying in. Though I have not seen any Bursa announcement to show that EPF has re-emerged as a substantial shareholder of YTL Power, but I suspect EPF has been buying back YTLP shares in past few months, after having sold down its stakes from 5.1% in 2023 to about 2.6% as of 30 June 2023. We shall know if EPF’s stakes in YTLP have indeed gone up once we have the annual report for FY2024 to be published by end October 2024.

Local research houses generally work for local institutional funds. Hence we saw local analysts upgraded YTL Power in late February 2024 after the Q2 FY2024 result announcement and in late May 2024 after the Q3 FY2024 result announcement, with Hong Leong being the most bullish (TP of RM7.45) and Maybank being the most bearish (TP of RM4.70). Local institutional funds typically do not push up the share price in an aggressive way but tend to accumulate shares when the stock is sold down by foreign funds as we saw in May-Aug 2024. Hence we may not see the share price of YTL Power surging up unless foreign funds buy in again.

Based on observation in past few weeks, I see early signs of foreign funds positioning to regain entry into YTL Power. Firstly, the selling on YTLP by foreign funds has eased off in the month of September. Secondly, foreign funds’ holding on YTLP is close to 14% which is the level seen in 2023 and before Covid. The selling of 180 million shares in May-Sept 24 is likely by foreign “hot money” which typically come in and out within 4-6 months. So the remaining 14% stakes held by foreign funds tend to be on long term basis, and are likely by retirement funds of Australia, Canada and the US. Thirdly, as the US has started to reduce interest rates, more funds will move out of the US and flow into Asia. Malaysia is one of the main markets for such foreign funds to invest their money in, as can be seen from the appreciating ringgit and rising KLCI. Having bought Tenaga and bank stocks in past 2-3 months in a big way, foreign funds are seen paring down stakes in Tenaga and big bank stocks in past few weeks since September. They may switch to other big cap counters like retails stocks and utilities again, as there are not many choices for big cap companies that have growth story.

As for the earnings prospect of YTL Power, there has not been much change lately except for the strengthening ringgit which will reduce its net profits in ringgit terms. PowerSeraya is on track to deliver steady net profit of S$170-190 million a quarter, but when translated into ringgit, the net profit contribution will become less by about RM40m a quarter at FX of RM3.25 (from earlier assumed RM3.45) to SGD1.00. The same goes for earnings contribution from Wessex and Jordan Power. All in, we may be looking at a reduction of RM50 million in net profit a quarter due to strengthening ringgit. For Q1 FY2025, I am looking at a net profit projection of RM800-850 million for YTL Power, instead of RM850-900m assumed earlier.