WHAT’S NEW

Deputy Education Minister Teo Nie Ching said the ministry will be calling for a fresh tender by early next year to continue providing around 10,000 schools nationwide with internet connectivity. The ministry has expressed unhappiness with the current service provided by YTL Communication Sdn Bhd under the RM4.45b 1BestariNet project. Apart from calling for a fresh bid, Teo said the ministry is also mulling various proposals, which include the allocation of funds for schools to choose their own preferred services.

YTL was awarded the RM4.45b contract in 2011 to implement the 1BestariNet project over a 15-year period in various phases, which is part of the government's digitisation agenda to provide laptops for students, as well as an e-learning platform. Under the contract, YTL was expected to roll out the services to reduce the digital divide between rural and urban students within 30 months from end-Dec 11, for which it was paid RM663m. In 2016, YTL found itself in hot soup after the auditor-general had highlighted the firm's failure to deliver internet connection to more than 4,000 schools, with delays ranging from 12 to 439 days. For the services provided between 31 Jul 16 and 30 Apr 18, Teo said YTL was paid a sum of RM741.2m.

COMMENT:

• Negative to YTLP… The above newsflow is negative for YTLP – who owns a 60% stake in YES Communications (YES), the telecommunications arm of the group and we expect share price to soften in the interim. We estimate the 1BestariNet project contributes approximately RM350m (or 3%) annually to group revenue. YES is still loss-making with the group recording some RM120m pretax losses in FY17.
• …as there is a potential earnings and dividend overhang. In the absence of contribution from 1BestariNet (assuming the government unwinds the 5-year rolling contract), the losses from YES will widen and is likely an earnings and dividend overhang in the near term. That said, we note that YES Communications accounts for only 1% of our SOTP with an equity value of RM228m.
• Maintain HOLD with a RM1.05 SOTP-target price. At our target price, the stock trades at 11x FY19F PE. Downside is likely to be supported by at least a RM500m dividend payout, translating to a 6.5 sen net DPS (dividend yield: 5.3%). Entry price: RM0.80.

Source: UOB Kay Hian Research - 1 Aug 2018