Investment Highlights

• Maintain HOLD on YTL Power (YTLP) with an unchanged RNAV-based fair value of RM0.94/share. Wessex Water accounts for more than half of YTLP’s RNAV and almost all of YTLP’s earnings.

• Although YTLP faces decline in earnings from a few divisions going forward, we believe that these would be partially compensated by a new power plant in Jordan. The downside is that contribution from the new power plant might only be felt from FY21F onwards. We have not accounted for earnings contribution from the new power plant in Jordan in YTLP’s FY21F net profit.

• The divisions, which may be recording weaker earnings are multi-utility (mainly YTLPSeraya), water and sewerage (Wessex Water) and mobile network (1BestariNet and YES).

• YTLP’s 45%-owned associate, Attarat Power Company is on target towards completing the construction of the 470MW US$2.1bil shale power plant in Jordan in July 2020. YTLP’s 45% share of the power plant’s net profit is estimated to be more than RM150mil per year.

• We believe that Wessex Water’s earnings may be affected by lower water tariffs and higher operating costs from FY20F onwards. We forecast pre-tax profit of the water and sewerage division (mainly Wessex Water) to be RM763mil in FY19E (1HFY19: RM399.7mil) and RM757mil in FY20F.

• Although Wessex Water has submitted its business plan for 2020 to 2025, the Water Services Regulation Authority of the UK said that there was further work to be done. Wessex Water has to submit another proposal on 11 April 2019. Wessex Water’s original proposal included reducing water tariffs by 3.5% from 2020 to 2025. Thereafter, Wessex Water has proposed that water tariff increases by 7.2% from 2025 to 2030.

• YTLPowerSeraya’s earnings in Singapore are expected to be unexciting going forward as the vesting contracts with SP Services will be eliminated in 2023F. Operating profit margin of the vesting contracts are expected to decline to S$16/MWh in FY20F and almost zero by FY23F from S$20/MWh in FY19F. We forecast pre-tax loss of the multiutility division (mainly PowerSeraya, Singapore) to be RM29mil in FY19E (1HFY19 loss: RM133.1mil).

• Finally, there are uncertainties over the renewal of the 1BestariNet contract. We believe that 1BestariNet accounts for half of the mobile network division’s revenue of more than RM800mil per year. The 1BestariNet contract is expected to expire on 30 June 2019. There is a possibility that the government may carry out an open bidding for the future implementation of the project.

Source: AmInvest Research - 27 Mar 2019