Results

In line - Reported 3QFY14 core earnings of RM306.9m, leading to RM856.7m for 9MFY14, which is 76.3% of HLIB’s and 78.8% of consensus.

Deviations

None.

Dividends

None.

Highlights

Malaysia power generation (Paka and Pasir Gudang) is expected to expire starting September 2015, which ends YTLP’s existing lucrative business segment. YTLP has loss out its tender for Track 3B 2,000MW coal-fired power plant to 1MDB. Currently, Energy Commission is expected to pursue direct negotiation for another 2,000MW coal-fired power plant under Track 4A and 4B 1,000MW, in which YTLP is expected to be one of the contender.

Singapore Seraya continued to experience pressure on both margin and sales volume due to increasing power generation capacity in Singapore. The division has been a major drag to the whole group.

The management is confident of Wessex Water achieving its 2010-15 regulatory outperformance target. However, we are concern about OFWAT (Water Services Regulation Authority of England and Wales) regulating the return or WACC for water assets at 3.85% (3.09%-4.61% after taking into account incentives/penalties) over the next 5 years regulatory period (FY15-FY20) as compared to Wessex’s 5.5% return based on WACC.

YTL Communication (YTLC) continued to report loss in 3Q14. We expect breakeven only in FY15. We believe that YTLP is migrating into LTE technology (currently WIMAX), which will require high capex as well as transitional cost, which may affect its margin in the early implementation stage.

Risks

Downside risks –

• Appreciation of RM against other foreign currencies.
• YTLC facing strong competition from the existing telcos.

Forecasts

Unchanged.

Rating

HOLD

Positives –

• Strong and stable cash flow.
• Large cash piles (RM8.1bn) allowing YTLP to look for more value accretive acquisitions

Negatives –

• The increasing competitive environment for YTLC especially with the implementation of LTE networks.
• Lower regulated return onWessex Water by OFWAT.
• Competitive and high operating cost environment by Seraya Power in Singapore.

Valuation

Maintained Hold with unchanged target price of RM1.66 based on 10% discount to SOP

Source: Hong Leong Investment Bank Research - 21 May 2014