- We maintain HOLD on YTL Power International (YTLP) with a revised SOP-based fair value of RM1.50/share (vs. RM1.52/share previously).

- YTLP’s 1QFY16 earnings fell 23% YoY to RM187mil on the back of a 4% dip in revenue. Earnings were below expectations – making up 19% and 20% of our and consensus estimates.

- The fall in revenue can be attributed to lower generation of electricity during the quarter as well as lower vesting volume for its multi-utilities business. Nevertheless, this was partly mitigated by the water and sewage division which saw lower operating cost and benefitted from the strengthening GBP (vs. MYR).

- The quarter’s bottom line was further impacted by a higher effective tax rate of 35% (vs. 22% a year earlier). The variance is mainly due to income subjected to different tax jurisdictions and expenses not deductible for tax purposes.

- Sequentially, earnings dipped marginally by 1.5% on a 13% growth in revenue. No dividend was announced.

- YTLP’s mobile broadband division continued to post losses (-RM102mil) during the quarter due to higher depreciation charges. Its water & sewerage division was the main driver of earnings, which were partly helped by the favourable exchange rate.

- Moving forward, we expect an earnings gap for its power generation division in 2Q & 3Q as both its Paka (808MW) and Pasir Gudang (404MW) plants will not be operating. Recall that the PPA for both plants was successfully completed on 30 Sept.

- Nevertheless, Paka will soon resume generation as it was selected as a successful bidder to supply power under the short-term capacity bid from March 2016 to Dec 2018. YTLP is expected to sign the PPA soon.

- We have tweaked our model to include contributions from the Paka plant, and updated our SOP values for the other divisions to reflect the latest numbers and exchange rates.

- While there will be an earnings gap of six months from its Malaysian-based power plants, we believe that this will be partly mitigated by contributions from its overseas businesses – i.e. Power Seraya, Wessex, PT Jawa, Electranet – that may benefit from the favourable forex rates.

- All in, we revised our SOP valuation to reflect these changes to arrive at a fair value of RM1.65/share, which implies 13x FY16F PE.

Source: AmeSecurities Research - 27 Nov 2015