Investment Highlights

• We are keeping our HOLD recommendation on YTL Power (YTLP) with a lower RNAV-based fair value of RM0.75/share (vs. RM0.82/share previously). We have revised YTLP’s fair value downwards to account for weaker cash flows from YTLP Seraya and Wessex Water.

• YTLP’s 1QFY20 results were below our expectations and consensus estimates. We have reduced YTLP’s FY20F net profit by 37.7% to account for larger losses in the telecommunication division and YTLP Seraya.

• YTLP’s net profit fell by 46.7% YoY to RM67.4mil in 1QFY20 dragged by bigger losses in the multi-utilities (mainly YTLP Seraya in Singapore) and telecommunications divisions (YES). Earnings of the water and sewerage division (Wessex Water) also slipped YoY in 1QFY20.

• The power generation division’s pre-tax profit was RM13.7mil in 1QFY20 vs. RM14.1mil in 1QFY19. We attribute the resilience of its earnings in 1QFY19 to consistent capacity payments. The PPA of YTLP’s 585MW Paka power plant in Terengganu was extended by three years and 10 months from 1 September 2017.

• The multi-utilities division’s (mainly YTLP Seraya in Singapore) pre-tax losses widened to RM69.2mil in 1QFY20 from RM15.9mil in 1QFY19. We believe that the outlook for the multi-utilities division is uncertain as the vesting contracts with SP Services have been eliminated.

• In addition, competition in the open electricity market in Singapore is stiff as there are more than 10 players servicing the island state. Out of these, six are involved in both generation and retailing. YTLP Seraya is one of the six.

• Pre-tax profit of the water and sewerage division (mainly Wessex Water in UK) slid by 2.7% to RM195.0mil in 1QFY20 from RM200.5mil in 1QFY19. Pre-tax profit of the water and sewerage division has been falling every quarter since 1QFY19. The YoY decline in the division’s pre-tax profit in 1QFY20 was attributed to higher operating expenses.

• Pre-tax losses of the telecommunications division widened to RM69.7mil in 1QFY20 from RM8.3mil in 1QFY19. After recording a pre-tax profit of RM10.0mil in 4QFY19, the unit sank into the red in 1QFY20. The losses can be attributed to the non-renewal of the RM4bil 1BestariNet contract after it expired on 30 June 2019. 1BestariNet generated revenue of RM400mil to RM500mil per year.

Source: AmInvest Research - 27 Nov 2019