YTL Power (YTLP) reported a weak set of numbers, as 9M FY20 corePATAMI of RM207m (-46% yoy) fell below both our and consensus estimates, delivering only 70% and 62% of respective full-year forecasts. We believe the weaker-than-expected performance in the quarter (3Q FY20), was due to a lower contribution from Wessex Water, whose PBT contracted by 19% qoq as it incurred higher costs due to adverse weather conditions. However, due to the challenging operating environment during the MCO, we are cutting our FY20-22E EPS by 0.1-7.0% and TP to RM0.71, while maintaining our HOLD call.

Abnormal Weather Conditions Disrupted Wessex Water

PBT for Wessex Water unexpectedly contracted by 19% qoq to RM153m (the division was generating about RM180m/quarter last financial year), due to higher sewerage costs arising from adverse weather conditions. We are expecting PBT to normalise in the coming quarters, as we view the weather condition as a one-off event. Despite the lower profit during the quarter, we believe that it would not severely impact YTLP’s ability to pay a dividend. 9M FY20 PBT for Wessex is RM536m, and to maintain our projected 5sen DPS, it would cost YTLP c.RM384m/year.

Lower Profit Likely in 4Q FY20E

Due to the MCO in Malaysia and Singapore during the 2Q CY20, we believe losses for YTLP’s Power Seraya and YES Communication, are likely to expand in the coming quarter. For Power Seraya, the reduction in electricity demand is likely intensify the price competition. Although the wholesale generation operation is heading for a consolidation, it will take another 2 years to resolve the issue. For YES, the ARPU is likely to fall, given that almost all telco operators were offering free internet data during MCO. To remain competitive in the long term, we believe YES would still need to beef up its network with the low frequency spectrum.

Maintain HOLD Rating With a Lower TP of RM0.71

We are trimming our FY20-22E EPS by 0.1-7.0% to factor in the latest developments. We are also cutting our 12-month TP to RM0.71 (from RM0.80), based on an unchanged 30% discount to our SOTP, while maintaining our HOLD call, due to a lack of re-rating catalysts in the near term. Meanwhile, there is still uncertainty in earnings due to MCO

Source: Affin Hwang Research - 17 Jun 2020