Results

• Within Expectations - Reported 2QFY18 and 1HFY18 core earnings of RM163.1m and RM328.8m, which made up 41.9% of HLIB expectations and 42.6% of consensus. We expect stronger earnings in 2HFY18 on full contributions from Paka Power, higher earnings from Wessex Water and lower losses from YES.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Despite an increase in revenue by +7.1% to RM2.6bn, core earnings fell by 14.6% to RM163.1m in 2QFY18, dragged by weaker margins for Singapore Seraya and Wessex Water mainly due to higher financing costs.

• QoQ: In tandem with the relatively flat group revenue with +2.4%, core PATAMI was flat with -1.6%. The turnaround of Paka Power (full quarter contribution) was offset by the weaker contribution of Wessex Water on set up costs for retail market for non-household customers and higher financing costs.

• 1H18: Group revenue increased by +8.6% on commencement of Paka Power, higher tariff and new retail market segment for Water Wessex and higher interest income for Holding Co. However, core earnings dropped by 5.6% due to high set up costs (Wessex) and financing costs (Wessex and Seraya).

• Prospects: Earnings growth for the subsequent quarters will be supported by the newly commenced domestic Paka PPA (Sept 2017) and potential turnaround of YES communication (from higher subscriber base). The developments of Jordan Attarat Power and Indonesia Jawa Power are on track with expected contribution in 2020.

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

• Unchanged.

Rating

BUY ( ↔ )

• YTLP’s earnings are only expected to increase by 2Q18 following the commencement of Paka Power PPA extension in Sep 2017. However, the ongoing tough market condition in Singapore Seraya and weaker regulatory return for UK Wessex Water remain a concern.

Valuation

• Maintain BUY with unchanged Target Price of RM1.45 based on 10% discount to Sum-of-Parts.

Source: Hong Leong Investment Bank Research - 26 Feb 2018