Investment Highlights

• YTL Power’s (YTLP) 3QFY17 results were commendable. Maintain our HOLD recommendation and FV of RM1.67. Our FV is derived from an SOP valuation (Exhibit 3). It implies a forward P/E of 17x, well above its historical average of 12.5x. We think the implied dividend yield of 6.6% is supportive of valuations going forward.

• YTLP’s 3QFY17 core net profit of RM152mil (QoQ: -16%, YoY: -23%) brought 9M17 core net profit to RM499mil (YoY: -6%). Results came in within our expectations but below consensus, accounting for 74% and 69% of fullyear estimates respectively.

• Yes 4G's pre-tax losses widened to RM15.6mil from RM13.7mil in 3QFY16. The losses, while higher, have been trending down since 3QFY15. The successful launch and sustained subscriber base has been reflected with higher revenue YoY for both the quarter and cumulatively, growing 12.3% and 15.8% respectively.

• Wessex Water's revenue declined 6.5% YoY to RM750.2mil, due to stronger MYR during the quarter (YoY: 8.2% on average). PBT declined by 2.4% QoQ and 7.5% YoY. We expect relatively stable contributions from Wessex barring forex fluctuations. Our FY16/18 forecasts assume a GBP/MRY rate of 5.20. A 10 sen change would impact EPS by approximately 1%.

• The power generation segment, consisting of the Paka power plant recognised a pre-tax loss of RM37.6mil due to maintenance and depreciation charges. This is due to the land lease dispute between YTLP and Tenaga Nasional. However, we expect it to contribute significantly in tandem with its scheduled commencement date of 1 Sep 2017 (1QFY18) since resolving it on 10 May 2017. While the segment displays a healthy pipeline of projects, namely 1,320MW PT Tanjung Jati power plant and 554MW oil shale project in Jordan, contributions from these assets will only be realised in 2021.

• YTLP’s positive free cash flow to equity (FCFE) generated from Wessex is close to £100mil per annum. It constitutes close to 70% of YTLP’s intended dividend policy for FY17F-FY19F. This should be supportive of our projected 10sen/share dividend payout despite a payout ratio >100%.

• Key risks to our forecast include the strengthening of MYR against GBP and earnings drag arising from the mobile broadband segment.

Source: AmInvest Research - 26 May 2017