YTLP reported core PATMI of RM120.3m for 3QFY19 and RM415.8m for 9MFY19, behind HLIB FY19 forecast (62.6%), dragged mainly by Singapore Seraya’ loss (lower vesting contract and higher operational cost) and lower Wessex contribution (higher operational, depreciation and finance costs). Cut FY19-21 earnings by 18.3%, 14.8% and 13.6% respectively. Downgrade to HOLD (from Buy) with lower TP: RM0.88 (from RM1.25) based on higher 20% (from 15%) discount to lower SOP: RM1.11 (from RM1.47). Seraya is expected continue loss-making in the near term, given the: 1) lower vesting contract; 2) take-or-pay contract for LNG; and 3) disappointing margins.

Below expectation. Reported core PATMI of RM120.3m for 3QFY19 and RM415.8m for 9FY19, below HLIB expectation (62.6%) and within consensus (71.3%). The disappointment against HLIB’s number was due to combination of: 1) Loss from Singapore Seraya due to lower vesting contracts and declining margins on high cost and increasing competitiveness; and 2) lower than expected contribution from Wessex, on higher operational costs, depreciation charges and finance costs.

QoQ. Despite the flattish group revenue, core PATMI decreased 20.6%, dragged by the higher loss in Seraya Power (on lower vesting contract effective Jan 2019, higher operating costs and declining margin), lower contribution from Wessex Water (lower revenue), which was partially offset by the higher earning at holding co.

YoY/YTD. Core PATMI deteriorated 37.8% YoY and 22.2% YTD, dragged by loss in Seraya (lower vesting contract and lower margin), lower contribution from Wessex (higher operating, depreciation and finance costs), which was partially offset by higher contribution from Contracted Paka Power (higher power despatch), lower loss from Yes Communication (higher revenue) and higher contribution at holding co.

Outlook: Singapore Seraya Power is expected remain in the red in the near term due to the cut in government vesting contract with the impending overcapacity issue in the Singapore power generation market while its take-or-pay contract for LNG supply will only end in mid-CY2023. The whole industry is in pain, with Hyflux is currently facing insolvency crisis. On a positive note, the commencement of Jordan Attarat Power (under construction) by 2020 will provide earnings buffer to the YTLP. Tanjung Jati Power is currently in development stage and pending financial close.

Forecast. Cut earnings for FY19-21 by 18.3%, 14.8% and 13.6% respectively, as we imputed higher operational costs for Wessex Water and Seraya Power.

Downgrade to HOLD, TP: RM0.88. Downgrade to HOLD (from Buy) with lower TP: RM0.88 (from RM1.25) based on 20% discount to SOP: RM1.11, as we cut earnings and imputed higher discount rate at 20% (from 15%) due to increasing earnings uncertainty posted by the now loss-making Singapore Seraya entity.

Source: Hong Leong Investment Bank Research - 3 Jun 2019