Results

• Below Expectations - Reported 1QFY17 core earnings of RM157.4m, which is 17.1% of HLIB’s expectation for FY16 and 19.9% of consensus forecast.

Deviations

• Dragged by the deferred extension of PPA for Paka (ongoing legal tussle with TNB) and lower earnings contribution from Seraya Power.

Dividends

• None.

Highlights

• YoY: 1QFY06/17 revenue declined by 27.3% to RM2.3bn, and core net profit dropped by 36.1% to RM157.4 mainly due to losses from domestic power plants (deferred extension of PPA).

• QoQ: Core net profit improved by 15.0% on the back of lower losses from mobile network YES.

• Prospects: Ongoing legal tussle for PPA extension of Paka will continue to drag the group’s earnings. Furthermore, the capacity oversupply situation in Singapore is expected to remain a challenge for Seraya Power. Earnings growth is only expected to come in by 2020 with the commencement of new Java power plant and Jordan power plant.

Risks

Downside risks –

• Appreciation of RM against other foreign currencies.

• YTLC facing strong competition from existing telcos.

• Lower regulatory return for Wessex Water.

• Continued pricing pressure (tariff) in Seraya Singapore.

Forecasts

• We cut earnings forecasts by 31.5% and 30.4% for FY17E and FY18F respectively after accounting for losses from domestic power and lower contribution from Seraya Power. We introduce FY19F earnings at RM728m.

Rating

HOLD ( ↔ )

• Despite the near term weak earnings prospect of the group, we expect its ongoing dividend payout of 10 sen to continue support its current share price, given the attractive dividend yield of 6.7%.

Valuation

• Maintain HOLD with unchanged Target Price of RM1.45 based on 10% discount to Sum-of-Parts. Despite the cut in earnings forecasts, we maintain our SOP after including YTLP’s new Java plant contribution, offsetting the exclusion of domestic power and lower earnings from Seraya.

Source: Hong Leong Investment Bank Research - 18 Nov 2016