- We reiterate our HOLD rating on YTL Power International (YTLP) with a lower SOP-based fair value of RM1.52/share (vs. RM1.56/share earlier), which implies FY15F-FY16F PEs of ~12x.

- YTLP’s 9MFY15 net profit of RM712mil came in below our estimates but in line with consensus expectations, making up 66% and 72%, respectively. The variance from our forecast can be mainly attributed to its higher-than-expected tax rate of 28% for 9MFY15 (9MFY14: 15%). As it is, the group’s PBT was in line (73%-78%) with both our and street estimates.

- In light of this, we have revised upwards our effective tax rate assumptions for FY15F-FY17F from 21% to 27%-28%, which resulted in a corresponding 6%-8% reduction in our FY15FFY17F earnings forecasts, and a lower fair value.

- On a sequential basis, YTLP’s 3QFY15 earnings had declined by 9%, in tandem with the 12% fall in its revenue due largely to lower sales and on-fuel margin recorded by its Power Seraya multi-utilities business.

- YoY, the group’s net profit slid by only 4% (PBT: +12%) despite the larger 18% topline decline as margin expansion in its domestic power generation business (+4.9ppts YoY from lower revenue following the rescheduling of its generation program and absence of provision for impairments) helped buffer the margin compression at Power Seraya (-1.1ppts YoY due to less electricity sold and at lower prices as well as lower margins from vesting non-fuel and retail contracts).

- YTLP’s Yes 4G services posted wider losses both QoQ (+14%) and YoY (+56%). We remain cautious about Yes’ losses in view of its commitment to expand its services to 10,000 schools under the 1BestariNet project. Breakeven level may not be achievable even if it hit its targeted subscriber base of 1mil.

- Looking ahead, the expiry of YTLP’s 780MW Paka and 390MW Pasir Gudang PPAs in Sept 2015 may lead to an absence of domestic earnings contribution. That said, we believe that the EC may temporarily extend the PPAs given Peninsular Malaysia’s current power reserve margin of only 12% and the threat of new plant-ups being delayed.

- Note that the the group’s overseas operations, primarily Power Seraya and Wessex Water, continued to account for the bulk of its profitable business (9MFY15: 78%). Its domestic power generation constituted ~16% of its profitable business.

- As expected, no dividends were declared. YTLP’s payouts have been erratic given the likely need for further investments against the backdrop of uncertainties over the extension/replacement of its domestic power plants. Hence, we are maintaining our zero dividend payout assumption.

- Valuation-wise, YTLP is currently trading at fully-diluted FY15FFY16F PEs of 13x – at the higher end of its 3-year PE band of 8x-14x.

Source: AmeSecurities Research - 22 May 2015