Upgrade to Buy as Value Emerges

YTLP delivered an unsatisfactory set of results as 9MFY18 PATAMI of RM414m (-12.7% yoy) only accounted for 70% and 60% of our and consensus respective forecast. We have lowered our EPS for 2018- 20E by 5.4%-6.4% to factor in the weaker performance from Singapore. We also revisited our assumption of the value of its assets, leading to a lower TP at RM1.05. However, we believe the recent stock price correction has made valuations attractive and yields appealing. Upgrade to BUY.

Competition Heats Up in Singapore

We were expecting YTLP’s Singapore operations to continue with its positive PBT qoq growth trend, but surprisingly it contracted by around 59% qoq in 3QFY18. PBT margin contracted from 2.2% in 2QFY18 to 0.9% in 3QFY18, as competition continued to intensify in an overcapacity environment. There could be some relief, as one of its competitor, Hyflux has filed for bankruptcy protection recently, which could help spur consolidation. Nevertheless this segment of the business only accounts for 6% of YTLP’s pretax earnings. Key PBT contributor – Wessex Water remains relatively stable (Fig 2).

Higher Financing Cost Did Not Help

Apart from the weakness in its Singapore operation, the higher finance cost for the holding co has also contributed to the decline in PBT during the quarter. The higher cost is expected to continue, until they are able to deploy the cash for new projects, as it could be capitalised and the finance cost would not be taxable too. Nevertheless, the stronger contribution from its UK water business has help to compensate for the cost increase.

Value Emerging, Upgrade to BUY With a Lower TP at RM1.05

We take a conservative approach in valuing its asset, disregarding the value of its loss making assets, and also the value of potential new assets (which has not closed), which helped to derive a lower RNAV based TP of RM1.05. We believe that the current share price assumes a significant weaker quarter ahead and a cut to the current estimated DPS of 5 sen, which we think is very unlikely. Given the huge discount between our RNAV and the current share price, we are upgrading our stock call on YTLP to BUY.

Source: Affin Hwang Research - 25 May 2018