Despite maintaining our HOLD call on YTL Power (YTLP), we are cutting our FY18-20E EPS estimates by 17%-32% and DPS by 7%- 16%, as 1QFY18 net profit at RM132m (-10% yoy) is weaker than expected, contributing to less than 16% of our and consensus forecast. The weak performance was due to higher finance cost. We have also lowered our TP to RM1.30 on the back of the cut in EPS.

Paka Power Plant Has Started Contributing

As Paka Power Plant start to commence operation in Sep 2017, all of YTLP’s operating unit has managed to deliver a positive yoy growth. We believe that the revenue would be stronger in coming quarters as the Paka Power Plant has only been in operation for a month in 1QFY18. We believe that as Paka’s contribution increases, the LBT from the power generation (contracted) segment should be able to turn around by 2HFY18. YTLP’s PBT should be 12% more in FY17 without the losses from Paka.

Mobile Broadband Yet to Breakeven But Improving

YTLP’s mobile business is still loss making, however the losses before tax for the year has reduced significantly and by more than 73% yoy to RM17m (from –RM65m), on the back of a 4% yoy improvement in revenue and lower operation cost associated to the launch of its nationwide 4G LTE network in FY17. Although YTL is on the right track to achieve breakeven, there could still be downside risk, if the telco operators decide to start lowering prices to maintain market share.

Higher Finance Cost Eats Into Growth

Despite EBIT growing by more than 29% yoy, PBT only grew by 13% yoy. The reduction in profitability is mainly due to higher finance cost related to the RM2.5bn debt which YTLP recently raised for the equity portion of its new projects. As these projects will need at least another 3 years before starting to contribute, we expect the earnings to remain suppressed, hence we are also cutting our dividend forecast on the back it too.

Maintain HOLD But With Lower TP of RM1.30

We have tweaked our EPS for FY18-20E to impute in the higher financing cost from the recent bond raising exercise, and lowered our DPS estimates based on the FY17 payout. Given the lack of short-term catalyst, we are keeping our HOLD call with and lower our TP to RM1.30.

Source: Affin Hwang Research - 23 Nov 2017