• YTL reported a weak set of numbers, as 1QFY21 PATAMI of RM1.29m (-92% yoy) is below both ours and consensus forecast, delivering only less than 2% of our respective full year forecast 
• Despite the stronger performance from the cement segment, this was not sufficient to compensate for the weaker performance of the management services and hotel segment 
• We have raised our TP to RM0.62, and upgrade our call to HOLD from SELL as we raised the valuation of its cement operation, due to a change in investor sentiment given a faster recovery in cement demand

Stronger cement profits due to reduction in cost

We were positively surprised by the better than expected performance from the cement segment, as YTL was able to generate PBT of RM91.5m (>100% yoy), despite the 9% yoy decline in revenue to RM1,059m, due to the better PBT margin. The decline in revenue is within our expectation, given that demand has remained relatively weak due to the lack of new mega infrastructure projects. As such, management has been focusing on rationalising its cost structure to sustain profitability. Although we had previously underestimated the impact of these cost cutting measures, the upside would still have to be derived from stronger sales.

Hospitality operation is struggling due to COVID-19

Although YT’sL cement operation was able to generate better than expected profit, it was not sufficient to compensate for the losses from its hotel and management services, which are related to the hospitality sector. As most of the countries in which YTL hotels are located still enforce strict border controls limiting foreign tourism, the losses are unlikely to reverse soon. We believe that international travel would only resume to normal by 2022, as it would take time before the population achieves herd immunity, and hence tourist only more willing to travel again. While some of countries have started a travel bubble arrangement, the impact is still limited.

Upgrade to HOLD with higher TP of RM0.62

Despite cutting our EPS forecast for FY21E by 90%, we have raised our EPS forecast for FY22/23E by 6.2%-16.0% as we are expecting a stronger earnings recovery in the following year supported by the growth from the cement sector coupled with a recovery in the hospitality operation. We have raised our TP to RM0.62, and upgraded our call to HOLD, as we increase the valuation on YTL cement operation due to faster recovery.

Source: Affin Hwang Research - 27 Nov 2020