Investment Highlights

• YTL Power sees a soft 1HFY18, but we expect a fully operational Paka power plant coupled with a normalising effective tax rate to drive earnings in the 2HFY18. Maintain our HOLD recommendation and FV of RM1.38/share. Our FV is derived from an SOP valuation. While we like YTLP for its reliable operational execution, the absence of compelling growth drivers in the interim caps its upside potential.

• YTLP’s 2QFY18 core profit of RM136mil (YoY: -18%) brought 1HFY18 earnings to RM269mil (YoY: -14%). Earnings were in line with ours but below consensus expectations at 39% and 35% of estimates respectively. A fully operational Paka power plant and normalising effective tax rate should drive 2HFY18 earnings.

• Paka drives the power generation segment with its full quarter’s contribution. It initially experienced start-up cost in 1QFY18 following operations being resumed on 1 Sep 17 after its 3 years and 10 months PPA renewal. However, we expect YTLP’s PT Tanjung Jati Power (TJP) and Attarat Power (APCO) projects to rejuvenate the power generation pipeline, coinciding with Paka’s expiring PPA in 2021.

• While the mobile broadband segment continues to drag, losses have bottomed out. Cost savings realized off a rationalised WiMAX to an LTE network have cushioned losses as well. Meanwhile, YTLP makes good headway with its 1BestariNet project, a project undertaken for the Malaysian government. On the flipside, it could see additional depreciation before a step change in receipts takes place in 2020.

• Singapore-based Power Seraya saw earnings halve to RM30mil YoY. Power Seraya could likely struggle amidst excess generation supply, exacerbated by newer, more efficient entrants. Meanwhile, Singapore’s energy regulator’s liberalisation efforts to promote competition will see a step change impact to energy retailing and vesting contracts in 2H18.

• Wessex Water did not see material developments in relation to its earnings nor operations. We would however like to highlight that YTLP’s dividends are essentially supported by cash flow generated from Wessex. Therefore, any sharp appreciation of the MYR may affect YTLP’s capability to meet its dividend payout. Our FY18 forecast assumes an exchange -rate of £5.20/MYR. A 10 sen change would impact EPS by approximately 1%.

• No change in our earnings forecasts as earnings are in line with our estimates. 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 Feb 2018