YTL Power’s (YTLP) results fell below both our and consensus expectations, as 1HFY20 core-PATAMI of RM136m (-49.2% yoy) contributed only 36% of our respective forecast. Although losses from Power Seraya have narrowed in 2QFY20, it was not sufficient to compensate for the widening losses from its telecommunication operation (YES). We cut our EPS forecasts by 10.7%-11.3% to factor in lower profits from YES and trim our TP to RM0.93, but maintain our BUY call.

Power Seraya’s Losses Narrowed

Despite recording lower revenue qoq in 2QFY20, losses before tax for the business segment narrowed to RM48m (-30% qoq). The drop in revenue was mainly driven by lower fuel prices rather than a drop in overall volume. Although the vesting contract level will be lower in 2020, we still expect losses to narrow, as we believe more capacity will be cut from the system, providing relief to the current overcapacity problem. We are expecting the overcapacity issue to be fully resolved by end of 2021, by which time the overall reserve margin will be reduced to 21-23% from the current 73%.

Widening Losses From YES Is a Negative Surprise

We had expected the losses for YES (telecommunications) to maintain relatively stable qoq, as the Bestari Net contract had already expired at the end of FY19. However, losses before tax have widened to RM107m in 2QFY20 from RM70m in 1QFY20. Although YES tried to attract additional subscribers by matching other competitors’ price points, we believe YES is still not as competitive, given that they are still faced with service issues due to the lack of low band spectrum. Despite the increased losses, we do not think it will impact YTLP’s ability to pay dividends, as the cash flow is mainly driven from Wessex Water.

Maintain BUY With a Lower TP of RM0.93

Due to the widening losses from YES, we are trimming our EPS forecast by 10.7%-11.3% for FY20-22E. We have also lowered the valuation on YES, which leads to an overall lower TP of RM0.93 (from RM0.95). However, we are keeping our BUY call unchanged, as we believe the recovery in Power Seraya profitability could lead the re-rating of YTL Power.

Source: Affin Hwang Research - 21 Feb 2020