We are downgrading our rating on YTL Power (YTLP) from BUY to HOLD, as we believe that the current share price is fairly valued, despite increasing our TP to RM1.10 from RM1.05. We are forecasting a 5sen DPS for FY19E-21E, but on the assumption that YTLP is able to retain the Bestari Net project. The contract for the latter is expiring next year and losses could widen, given the project is a significant revenue generator for its telecommunication arm.

Cash Flow Is Still Very Much Dependent on Wessex Water

Wessex Water continues to be the main earnings and cash flow generator for YTLP, delivering close to 104% of the group PBT in FY18. The strong 12.4% yoy PBT growth in FY18 is mainly driven by lower expenditure, as volume is relatively stable while tariff increases is based on the movement of Retail Prices Index (RPI). However, there could be some downside risk to our margin forecast in 2020-2025, as based on the pricing plan submitted to the regulator recently, Wessex has proposed for no additional price hikes apart from linking it to the inflation.

Losing the Bestari Net Project Poses a Bigger Risk to DPS

YTLP’s 60% owned YTL Communication (YES) is still lose making, due to intense price competition within the mobile segment. However, based on our estimates close to 40% (RM320m/yr) of its revenue is derived from the Bestari Net contract, a government program to connect 10,000 government school across Malaysia. The government has decided to call for an open tender for the program, as the current contract is slated to expire in June 2019. We believe that YES will have to be more competitive in the next bidding, as it will be conducted on an open tender basis.

Downgrade to HOLD Call With Higher TP of RM 1.10

We are downgrading the stock to a HOLD, despite raising our TP to RM1.10 on the back of 1.4%-18% EPS upgrade to factor in better performance from Wessex Water. We believe that the current valuation is fair, as we foresee very limited upside on its DPS in the near term. However, there could be downside risk to the DPS, if YTLP is not able to retain the Bestari Net contract.

Source: Affin Hwang Research - 2 Oct 2018