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

- We maintain YTLP’s FY14F-FY16F earnings as the group’s 9MFY14 net profit of RM737mil came in within our expectations, accounting for 73% of our FY14F earnings of RM1,010mil compared to 71% in FY13. But the results were below consensus, at only 67% of street’s RM1,089mil. The group did not declare any interim dividend as expected, since the last dividend declared was in 1QFY13.

- Sequentially, YTLP’s 3QFY13 revenue decreased by 13% to RM3.3bil, largely due to lower fuel oil trading and decreased electricity sales for Power Seraya in the midst of a more competitive regime in Singapore, coupled with a 34% contraction in the group’s 4G Yes revenue to RM194mil.

- Hence, the group’s pre-tax fell 22% QoQ to RM306mil due to lower sales and margins from Power Seraya coupled with a 44% QoQ increase in mobile broadband network loss to RM40mil. But significant tax credits recognised for UK-based Wessex Water Group have cut the group’s effective tax rate by 7.7ppt QoQ to 14.5%, leading to a 3QFY14 net profit increase of 4% to RM256mil.

- YoY, YTLP’s 9MFY14 net profit slid by 4% in tandem with a 7% revenue decline as Power Seraya sold electricity at lower prices and margins against a backdrop of expanded overall capacity in Singapore, coupled with higher forex losses and lower dividends from associates. Overseas operations, mainly Power Seraya and Wessex Water, accounted for 87% of the group’s 9MFY14 profitable business.

- YTLP’s Yes 4G services’ 3QFY14 loss rose by 44% QoQ, but was down by 27% YoY to RM40mil (See table 2) as the group continued to incur additional expenditures to expand its subscriber base. Yes’ 9MFY14 loss contracted by 39% YoY to RM118mil (compared to our FY14F loss of RM150mil).

- We remain cautious on Yes losses 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 after Yes achieves its targeted subscriber base of 1mil. Hence, we maintain our FY14F-FY16F loss assumptions for now.

- As YTLP did not secure 2,000MW coal-fired power plant under the Energy Commission’s Project 3B, the group’s exposure to Malaysian power generation earnings, which accounted for 13% of 9MFY14 profitable operations, may cease by Sept 2015 and lead to a significant absence of domestic earnings contribution. The stock currently trades at a pricey FY14F PE of 13x, compared to Tenaga’s 12x.

Source: AmeSecurities