YTL reported a disappointing set of results for 9M FY20, as core PATAMI of RM62m (-76% yoy) only constituted 56% and 36%, respectively, of our and consensus full-year forecasts. We believe the weaker-than-expected performance was due to its hotel and cement operations, where contribution unexpectedly contracted in 3Q FY20. We are also cutting our FY20-22E earnings by 1.8-35.1%, to incorporate our new forecast for the utilities, property and cement segments. We reaffirm our Sell call with a lower TP of RM0.63.

Cement Division Negatively Impacted by the MCO

YTL was not able to sustain the improvement in 2Q FY20, as PBT for 3Q FY20 unexpectedly contracted by 62% qoq, driven by lower revenue from both YTL Cement and Malayan Cement. Despite operations being only disrupted for 2 weeks due to the MCO during the 3Q FY20, the segment recorded a 27% qoq decline in revenue. The decline was due to several chunky orders, which YTL was not able to deliver during the MCO. We believe that earnings for the segment are likely to remain challenging, as it will take YTL another 2-3 months before they are able to achieve similar operating efficiency to pre-MCO levels.

Expecting Weaker Earnings Ahead for Hotel and Utilities Segments

Apart from the cement segment whose earnings are likely to remain depressed for the next 2 quarters due to the MCO, we believe earnings at the hotel and utilities segments will face similar pressure. Revenue contribution for YTL’s hotel operations is negatively impacted, as countries have closed their borders to tourists and most of its hotel operations was also suspended during the MCO. Despite the fall in revenue, YTL will still need to honour lease guarantee agreements to the REITs. With tourists still unwilling to travel, losses should continue to drag YTL’s group profit.

Takes Time to Recover, Reaffirm SELL Rating

We are lowering our RNAV-based 12-month TP to RM0.63 (from RM0.66) after reviewing the fair value of its subsidiaries, and cut our EPS for FY20- 22E by 1.8-35.1%, factoring in a more challenging operating environment. As we believe that the earnings will likely remain suppressed for at least the next few quarters, we are reaffirming our SELL rating. Upside risks to our call: i) higher construction contract wins, ii) narrowing losses from YES, and iii) improving demand in Singapore high-end property.

Source: Affin Hwang Research - 17 Jun 2020