• YTL Power (YTLP) reported a strong set of numbers for 1HFY21, as corePATAMI of RM162m (+18% yoy) was within both our and consensus expectations, delivering 51% and 49% of our respective forecasts
• We believe the stronger-than-expected performance was mainly due to the strong recovery in its Singapore operation earnings, as the overcapacity situation continued to improve due to the recent retirement of capacity
• We kept our EPS forecasts unchanged and maintain our 12-month TP of RM0.71. As we believe the good news is already in the share price, we are also keeping our HOLD call unchanged.

Recovery in Singapore Earnings Is Stronger Than Expected

YTLP’s Singapore operation (Power Seraya) PBT improved significantly, increasing by 303% qoq to RM146m. Although the headline numbers have included the recovery of the impairment of receivables due to a favourable court ruling, core PBT was still up by 109% qoq. We believe that the improvement was largely due to the improving operating environment, as the current overcapacity problem continued to ease with more power producers continuing to retire their capacity. EMA predicts that the current reserve margin in Singapore would be lowered to 31% by end of 2021 from the current 62%.

Improving Performance Reduces the Risk of a Lower DPS

YTLP commented that it is now targeting to complete the construction of Attrat Power Company (APCO) by mid-2021 (it was supposed to have started producing in mid-2020). Despite the delay, we are not revising our DPS forecast, as we believe that the improving performance from Power Seraya is sufficient to compensate for it. Apart from that, Wessex Water’s stable performance will continue to support most of the cash flow needed for dividends. PBT of Wessex Water remained relatively flat qoq at RM135m, but was down by 29% yoy due to the revised rate after the reduction in the regulated return.

Things Are Improving But Share Price Is Fairly Valued, Reiterate HOLD

We have maintained our EPS forecasts, despite the better performance from Power Seraya, as the increase was only sufficient to compensate for the delay in the completion of APCO. We have also have kept our HOLD call and RNAV-based TP of RM0.71 unchanged, as we believe that the stock is already fully valued. Although Power Seraya’s performance is improving, the impending acquisition of Tuaspring is likely to limit the upside risk of a higher payout for the near term. Key risks include: 1) lower-than-expected inflation in the UK and 2) higher-than expected losses of its mobile segment.

Source: Affin Hwang Research - 26 Feb 2021