- We maintain HOLD on YTL Power International (YTLP), with a lower sum-of-parts based fair value of RM1.65/share (vs. RM1.86/share previously), which implies a CY14F PE of 12x.

- Our lower fair value stems from the 7%-8% cuts to YTLP’s FY14F-FY16F net profits due to lower revenue assumptions for Power Seraya’s multi-utilities business.

- YTLP’s 1HFY14 net profit of RM482mil came in below expectations, accounting for 44% of our earlier FY14F earnings of RM1,088mil and 43% of street’s RM1,120mil.

- Sequentially, YTLP’s 2QFY13 revenue slid by 5% to RM3.8bil, due largely to lower fuel oil trading and decreased electricity sales in a more competitive regime in Singapore. But the group’s pre-tax profit rose by 32% QoQ to RM328mil as forex losses decreased by 75% to RM18mil.

- YoY, YTLP’s FY14 net profit slid by 5% in tandem with a revenue decline of 6% as Power Seraya sold electricity at lower prices against a backdrop of expanded capacity, coupled with impairment provisions and forex losses. Overseas operations, mainly Power Seraya and Wessex Water, accounted for 87% of the group’s 1QFY14 profitable business.

- YTLP’s Yes 4G services’ loss declined by 44% QoQ and 64% YoY to RM28mil (See Table 2). But we remain uncertain if this trend of declining losses is sustainable given the group’s commitment to expand its services to 10,000 schools in Malaysia under the 1BestariNet project. There is a likelihood that the breakeven level may not be achievable even after Yes achieves its targeted subscriber base of 1mil. Hence, we maintain our FY14F-FY16F loss assumptions for now.

- While YTLP submitted the lowest bid for the 2,000MW coalfired power plant under the Energy Commission’s Project 3B, the overall project cost (including additional transmission network costs borne by Tenaga) under 1MDB’s proposal appears to be more attractive. Hence, 1MDB, which plans to list its power assets this year, may secure the concession.

- This means that the group’s exposure to Malaysian power generation earnings, which accounted for 13% of 1HFY14 profitable operations, may cease by Sept 2015 and lead to a significant absence of domestic earnings contribution.

- Without a clear dividend policy, the company has been steadily undertaking share buybacks, which has reached 9.9% of the group’s share capital. These could potentially be distributed back to shareholders or cancelled.

- The stock currently trades at a pricey FY14F PE of 13x, compared to Tenaga’s 12x.

Source: AmeSecurities