-  We maintain HOLD on YTL Power International (YTLP) but with a lower sum-of-parts based fair value of RM1.56/share (vs. RM1.65/share previously), which implies a CY15F PE of 12x. We have cut YTLP’s FY15F-FY16F earnings by 6%-10% as the group’s FY14 pre-tax profit of RM1,116mil came in below expectations, 12% below our forecast of RM1,263mil and 16% below street’s RM1,329mil.

-  But the group’s FY14 net profit of RM1,186mil was above expectations – 17% above our forecast and 11% above street’s. This stemmed from a one-off tax credit and deferred tax reversal of RM267mil following an industry-wide re-categorisation of UK-based Wessex Water group’s capital allowances from industrial building to long life plant. Additionally, there was a further RM191mil deferred tax credit following the progressive reduction in the UK corporation tax from 23% in 2012 to 20% from 1 April 2015.

-  For FY16F, we expect earnings to decline slightly by 2%, in tandem with the expiry of the Paka and Pasir Gudang power purchase agreement in September 2015. We introduce FY17F earnings with a 3% growth as the group’s other core divisions are expected to improve.

-  YTLP declared a 4QFY14 single-tier dividend of 10 sen/share, the first since 1QFY13. Given the likely need of further investments against the backdrop of uncertainties over the extension or replacement of the Malaysian power plants, it is unclear if the group had changed its dividend policy. Hence, we maintain a zero FY15F-FY17F dividend payout ratio for now.

-  Sequentially, YTLP’s 4QFY14 revenue was flat QoQ at RM3.3bil as higher generation of domestic electricity sales was mostly offset by lower revenue from Singapore’s Power Seraya.

-  But the group’s 4QFY14 pre-tax profit fell 24% QoQ to RM233mil due to lower sales and margins from Power Seraya, higher operating costs for the domestic power plants, coupled with a 29% QoQ increase in mobile broadband network loss to RM52mil. The group’s 4QFY14 net profit surged by 76% QoQ to RM448mil largely due to a positive tax charge of RM216mil, driven by the one-off UK tax provision reversals.

-  YoY, YTLP’s FY14 pre-tax profit declined by 17% due to unrealised forex losses of RM91mil, lower electricity prices and demand for Power Seraya, given the overcapacity in Singapore. Overseas operations, mainly Power Seraya and Wessex Water, accounted for 87% of the group’s FY14 profitable business.

-  The stock currently trades at a fair FY15F PE of 11x, comparable to Tenaga.

Source: AmeSecurities