• YTL Power (YTLP) reported a disappointing set of numbers, as FY20 corePATAMI of RM262m (-52%) accounted only for 82% and 87% of market and our full year forecasts; YTLP also didn’t declare any cash dividend for the quarter
• The weaker-than-expected performance can be attributed to the weak numbers from Wessex Water, as its profitability was negatively impacted by higher costs and also impairments related to COVID-19
• We have tweaked our forecasts for FY21-22E by 3.4%-11.7% to factor in the latest developments, but maintain our TP at RM0.71 and our HOLD call

Wessex Water Drags Overall Profitability

The lower-than-expected contribution from Wessex Water was a negative surprise to us, as its PBT declined by 18% yoy despite a 3% yoy increase in revenue for FY20. The margin contraction was due to higher sewerage costs arising from the adverse weather in 2HFY20, and also higher-than-expected provisions on its receivables due to COVID- 19. However, management guided that they could recoup the losses on its receivables against future tariffs. Apart from that, the recent change in tax ruling in the UK has forced Wessex Water to reassess its deferred tax liability, which resulted in additional tax expenses of RM162m for FY20.

Distributing Treasury Shares Instead of Cash DPS

Instead of announcing a 5sen DPS for FY20 as the street and us were expecting, YTLP will instead distribute 1 treasury share for every 16 existing shares held, which roughly implies c. 4.3sen of DPS for each existing share. On hindsight, the buyback of shares might not have been the best use of its capital/cash, as the average cost of these treasury shares is at RM1.47, significantly below current share price of RM0.69. We are assuming that YTLP will reinstate its cash DPS in FY21, as we believe that the cut in DPS is more of a precautionary measure due to the current uncertainty. YTLP is also still in the midst of acquiring Tuasspring (power plant in Singapore) for around RM1bn.

Reiterate HOLD, With Unchanged TP of RM0.71

We have lowered our EPS forecasts for FY21-22E by 3.4%-11.7% to factor in the latest development, while keeping our RNAV-based TP unchanged at RM0.71 as well as our HOLD call. We believe that with its Jordan project starting to contribute in FY21E, there is a high possibility that YTLP would resume its cash dividend. Key downside risks include: 1) lower-than-expected inflation in UK and 2) higher-than-expected losses of its mobile segment. Key upside risks include: 1) faster-than-expected recovery in the Singapore market, and 2) the award of low frequency spectrum to YES

Source: Affin Hwang Research - 1 Sept 2020