Investment Highlights

• Maintain HOLD on YTL Power (YTLP) with a lower discounted RNAV-based fair value of RM0.94/share vs. RM1.38/share previously. We forecast YTLP’s net profit to be RM505.0mil in FY19F and RM479.0mil in FY20F. We estimate YTLP’s gross DPS to be 5 sen each for FY19F and FY20F, which translates into a dividend yield of 5.7%.

• There are a few risks. First, we expect YTLP’s net profit to be unexciting in FY19F and FY20F due to poor performances from YTL PowerSeraya and Wessex Water. From FY20F onwards, there are uncertainties on Wessex Water’s outlook.

• We foresee a challenging operating environment for YTL PowerSeraya in Singapore as vesting contracts with SP Services are expected to be eliminated by 2023. Operating margins are anticipated to fall from S$20/MWh in FY19F to S$16/MWh in FY20F. Furthermore in the Singapore retail market, Seraya Energy is expected to compete with other companies to sell electricity the consumers. Recall that in November 2018, Singapore’s electricity retail market was fully liberalised, starting with the Jurong area.

• All these factors coupled with an unplanned outage in the power plant in 1Q are envisaged to result in minimal earnings contribution from YTL PowerSeraya in FY19F.

• Wessex Water’s future earnings may be affected by OFWAT’s (Water Services Regulation Authority) proposals to share savings from the water companies’ high gearing or leverage, with consumers. This would result in lower returns for Wessex Water. For UK consumers, they would enjoy lower water bills.

• Water companies in the UK have submitted their business plans for the period of year 2020 to 2025, for OFWAT’s review. OFWAT is expected to publish its initial assessment of each company’s business plan by 31 January 2019. OFWAT will make the final decision on each company’s services and the limit of the price that they can charge to customers in December 2019.

• Second, earnings of YTLP’s mobile broadband unit may fall in FY20F due to the expiry of the 1BestariNet contract on 30 June 2019. This may also impact the performance of the YES network unit as it uses the same base stations as 1BestariNet.

• Depending on the findings of Mimos Bhd, the government will decide whether to continue or change the 1BestariNet programme, by the middle of 2019F. Mimos is expected to submit its final report on 1BestariNet in January 2019.

Source: AmInvest Research - 9 Jan 2019