YTLP reported disappointing 9M18 result of only RM522.2m (+5.1% YoY), following lower margins of Wessex Water and Seraya Power as well as continued losses from Yes Communication. Cut earnings for FY18, FY19 and FY20 by 10.6%, 13.0% and 8.8%. Maintain BUY recommendation with lower SOP-derived TP: RM1.08.

Below expectation. Reported core PATMI of RM193.4m for 3QFY18 and RM522.2m for 9MFY18, achieving 66.5% of HLIB FY18 forecast and 67.6% of consensus. The lower than expected core PATMI was due to lower profit margin of Wessex Water and Seraya Power and continued disappointment of Yes Communication.

QoQ. Core PATMI increased 18.5% on stronger contribution of Wessex Water on lower operating costs as well as lower group tax expenses.

YoY. Core PATMI increased 30.1% mainly due to commencement of Paka Power Plant, contributing to profit in 3QFY18 vs loss in 3QFY18 and higher contribution from Wessex Water on approved price hikes and lower operating costs, partially offset by weakened margin from Seraya Power.

YTD: Core PATMI improved marginally by 5.1% mainly on turnaround of Paka Power Plant and lower loss from Yes Communication , which was offset by weakened margin from Seraya Power.

Outlook: Earnings are expected to remain relatively stable in the next few years prior to the commencement of Jordan Attarat Power and Indonesia Jawa Power by 2020. Uncertainty arises on the turnaround of Yes Communication, given the recent change in government may affect its Bestari project.

Forecast. We cut our earnings for FY18, FY19 and FY20 by 10.6%, 13.0% and 8.8%, following cutting margins for Wessex Water and Seraya Power and increase loss for Yes Communication.

Maintain BUY, TP: RM1.08. We cut our SOP-derived TP to RM1.08 from RM1.45 following the earnings adjustments. We maintain BUY recommendation as we believe the recent sell down of YTLP share price has undervalued the utility company, which has strong cashflow from subsidiary Wessex Water as well as upcoming new power plants in Jordan and Indonesia.

Source: Hong Leong Investment Bank Research - 25 May 2018