YTL Power (YTLP) results are broadly in line with expectations, as 1HFY19 core PATAMI of RM269m (-0.1% yoy) contributed approximately 42% of our and the consensus FY19E forecast. However, the headline numbers were negatively impacted by an impairment on receivables of RM70.5m in relation to its Singapore operation. We are lowering our EPS forecasts by 6-7% for FY19-21E, reducing our TP to RM0.85 and downgrading our call to SELL from Hold due to the challenging outlook for the Singapore power market.

Wessex Water Within Expectations

Despite an increase in water tariffs which led to a stronger revenue growth (+3.1% qoq; +2.0% yoy), PBT remained flattish for the quarter at RM199m (-0.6% qoq; 1.5% yoy). However, the performance is still within our expectations. The higher costs for the quarter were mainly due to the higher financing cost. We believe that as long as Wessex is able to continue to deliver similar profitability as in 1HFY19, YTLP would be able to match a similar dividend payout to FY18 of 4.0sen by the end of FY19, as Wessex is the largest profit contributor to the group (see Fig 2).

Power Seraya Falls Into Negative Territory

Even after excluding the impairment charge on receivables of RM70.5m in 2QFY19, core losses from the segment continued to widen to -RM47m from -RM16m in 1QFY18. Although we did not expect the competition in the wholesale electricity market in Singapore to ease significantly, the increase in losses did come as a surprise to us. Unless the Singapore government would re-introduce a higher vesting level, in view of development of Hyflux which started its court-supervised reorganisation recently, we have lowered our forecast for the segment due to the challenging outlook.

Lowering TP to RM0.85 and Downgrading to SELL

We are downgrading our call from Hold to SELL, as we lower our RNAVbased TP to RM0.85 (from RM1.00) on the back of a 6-7% earning cuts to factor in the current weak operating environment. We believe that the current valuation is rich, due to the limited growth for its DPS in the near term. However, there could be even more downside risk to our call if the operating environment for the wholesale electricity market worsens.

Risks to Our Call

Key upside risks to our call include: 1) stronger-than-expected GBP and SGD, 2) lower-than-expected losses for its mobile broadband segment and 3) weaker competition in its Singapore power operation.

Source: Affin Hwang Research - 27 Feb 2019