Period  2Q14/1H14

Actual vs. Expectations 1H14 net profit of RM481.8m came in slightly below expectations, which made up 45% of our full-year FY14 estimates and 43% of market consensus. This was mainly due to lower associate income, which contracted by 45% QoQ to RM46.3m from RM84.9m due to reduced profit share and tax adjustment in Electranet.

Dividends  Although no dividend was declared in 2Q14, the 1-for-20 treasury share distribution announced yesterday may somewhat satisfy investors who have not been receiving any dividend for the past four quarters. This share distribution (book closing on 13 Mar) implies a yield of 5%.

Key Results Highlights  Despite revenue declining 5%, 2Q14 net profit rose 5% QoQ to RM247.0m from RM234.8m in 1Q14. This was attributable to lower unrealised forex losses of RM11.3m in 2Q14 from RM70.5m previously although associate contribution was lower in the quarter. Segmental-wise, its local IPPs’ pre-tax profit declined 20% to RM48.5m on lower generation of electricity sales coupled with a RM20.9m provision for inventories

impairment. PowerSeraya posted higher PBT by 7% on lower operating costs while Wessex Water’s pre-tax profit inched up 1% on higher sales. YES also saw improvement with pre-tax loss being narrowed to RM28.1m from RM49.8m on higher revenue which rose 5%.

 YoY, 2Q14 net profit fell 4% from RM256.1m, partly due to the lower associate income. For 1H14, net profit contracted 5% to RM481.8m from RM508.9m last year, attributable to lower earnings from PowerSeraya due to reductions in: (i) fuel oil trading volume, (ii) unit of electricity sold, and (iii) electricity price. However, Wessex Water reported higher PBT by 19% on tariff hike while YES’s pre-tax loss narrowed to RM77.9m from RM137.7m as revenue doubled. Earnings for local IPPs were flat at RM109.1m.

Outlook  Recent news reports suggested that 1MDB will be given the Project 3B although YTLPOWR had put in the lowest bid against 1MDB, TENAGA and Malakoff for a tender to build and operate a 2,000MW coal-fired plant. If this is true, it would be a major blow to YTLPOWR as it has been on the look-out for new project to bridge the earnings gap as its Gen1 PPA for Paka and Pasir Gudang Power Plants are expiring in 2015.

 Although strong SGD should benefit YTLPOWR, electricity market in Singapore remains competitive with new capacity coming to the market. While the PPAs for local IPPs are expected to expire soon, earnings prospects for YES are set to be better judging from its growing subscriber base. For Wessex Water, earnings are expected to be fairly flattish until it gets the next tariff revision.

Change to Forecasts While keeping our estimates unchanged, we decided to cut NDPS to 1 sen from 3 sen for FY14-FY15 given the absence of dividend payment in the past five quarter.

Rating Maintain MARKET PERFORM

Valuation  We keep our RM1.97/RNAV share target price for now. Although there is 16% upside from current price, we adhere to our MARKET PERFORM rating as the uncertainty of the Project 3B would likely cap its share price performance.

Risks  Lower dividend payouts, widening YES’ losses and the rise in  global economic risks, especially in Europe.

Source: Kenanga