Results

• Within  Expectations  -  Reported  1QFY15  core  earnings  of RM254.6m,  accounted  for  27.9%  and  24.0%  of  HLIB  and consensus forecasts, respectively .

Deviations

• None.

Dividends

• None.

Highlights

Higher  contributions  from  YTL  Power  Generation  Plants  due to  higher  power  generations  from  Paka  and  Pasir  Gudang. Both  power  plant  concessions  are  expected  to  expire  by Sept  2015.  We  have  not  imputed earnings from the talk s  on potential  concession extension, as we see low possibility on the extension.

Singapore  Power  Seraya  is  expected  to  remain  challenging given  the  substantial  increase  in  power  generation  capacity in  the  country.  Earnings  visibility  remained  weak  due  to competitive  pressures  and  potential  lower  tariffs,  with  high power  generation  costs.

UK  Wessex  Water  has  increased  its  average  pricing  since 4Q14,  improving  revenue  and  earnings .  However,  we remain  cautious  on  potential  lower  returns  for  the  next   5-years  regulatory  period  (FY15-20)  due  to  new  ruling  by  UK Government  to  lower  return  or  WACC  for  water  assets  to 3.85%  vs. Wessex’s existing 5.5% return based  on WACC.

YTL  Communication  (YTLC)  suffered  from  lower contribution  from  Project  sales (likely 1 Bestari net), affecting its revenue  and bottomline.

Risks

• Downside  risks –
• Appreciation  of RM against other foreign  currencies.
• YTLC  facing strong competition from existing telcos.
• Continued  pricing pressure (tariff)  in Seraya Singapore.

Forecasts

• Unchanged.

Rating

Sell

Positives

• Strong and stable cash flow.
• Large  cash  piles  (RM8.7bn)  allowing  YTLP  to  look  for more value  accretive  acquisitions

Negatives

• The  increasing  competitive  environment  for  YTLC especially with the implementation  of LTE networks .
• High  operating  cost  environment  in  United  Kingdom (inflationary  pressure)  and Singapore  (high  fuel cost).
• Overcapacity  of power  generation  in Singapore  market.

Valuation

• Downgrade  to  Sell  with  unchanged  target  price  of  RM1. 44 based  on  10%  discount  to  Sum-of-Parts.  We  expect earnings  to  remain  depressed  in  the  near  term,  due  to potentially  lower  margins  for  Singapore  Seraya  and  UK Wessex  Water,  with  continued  earnings  uncertainty  from YTLC  as  well  as  concession  expiry  of  domestic  power generation.

Source: Hong Leong Investment Bank Research - 21 Nov 2014