YTL reported 1HFY19 PATAMI of RM171m (-36% yoy), falling below our and consensus expectation, as it constituted 34% and 31% of our respective full year forecast. Apart from the weaker-thanexpected performance from both the utilities and property segment, the higher effective tax rate are the reasons behind the earnings miss. We have cut our FY19-21E earnings by 20-22% to incorporate our latest forecast for the utilities segment, and also lowered our TP to RM 0.70. SELL call maintained.

Cement: Marginal Growth Is Good But Still Far From Recovery

Similar to its peers which have also registered operational improvement, YTL cement delivered marginal growth for the quarter, as EBIT improved to RM56m in 2QFY19 from RM55m in 1QFY19. This is nevertheless still significantly lower from its previous run-rate of c.RM160m a quarter. However, we remain cautious about a recovery, as the overcapacity issue is still a problem, and its competitors are restructuring their cost structure to be more competitive. The restarting of major infrastructure projects in Malaysia would help ease some pressure, but is still not sufficient to resolve to the capacity issue, in our view.

Higher Effective Tax Rate Was a Negative Surprise

We had previously assume that the effective tax rate for the group would normalise below the statutory tax rate of around 19%, similar to its historical average, but the tax rate has averaged around 25% for 1HFY19. As such, we have revised upwards our effective tax rate forecast to reflect the recent development.

Challenging Outlook, Maintain SELL

We have lowered our RNAV-based TP to RM0.70 as we revise the fair value of its utilities segment, and cut our EPS forecast for FY19E-20E by 20%-22%, factoring in a more challenging operating environment and a higher effective tax rate. Due to the weak prospects and lack of near term growth catalyst, we are maintaining our SELL call.

Risks to Our Call

Upside risks: i) Higher construction contracts win ii) Improving outlook for the utilities and cement operations.

Source: Affin Hwang Research - 28 Feb 2019