Results

• Within Expectations - Reported 2QFY14 core earnings of RM279.4m, leading to RM534.0m for 1HFY14, which is 59.3% of HLIB’s and 53.4% of consensus.

Deviations

• Higher than expected dividend income for Investment holding company and lower than expected tax rate.

Dividends

• None.

Highlights

• YoY: Despite revenue decreased by 19.4% to RM3.0bn, 2QFY06/15 core net profit improved by 15.9% to RM279.4m mainly due to higher dividend income, associates contribution, Wessex margins and domestic power generation.

• QoQ: 2QFY06/15 core net profit improved by 9.8%, outpacing decline in revenue of 9.5%, due to improved margins from domestic power generation, Seraya Power and Wessex Water, as well as lower losses from Yes.

• YTD: 6MFY06/15 core net profit dropped by 2.4% to RM534.0m, mainly dragged by lower sales and margins for Seraya Power and losses of project income for Yes.

• Prospects: Expect continued margin pressures for Seraya Power (due to overcapacity in the power generation system in Singapore) and Yes (due to lower income from projects), while domestic power generation is expected to be resilient (guaranteed take-or-pay clause).

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

• Increased earnings by 6.5-8.7% to mainly to account for higher contribution from Investment Holding Cos (dividend income).

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

• Maintained Sell with higher target price of RM1.50 (from 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 - 13 Feb 2015