Another disappointing quarter in 3Q16, the 4th quarter in a row, which saw net profit sliding 5% sequentially, dragged down by the problematic PowerSeraya which was expected. The only positive note from the results was losses at YES have narrowed. However, tough operating environment for the Singaporean IPP does not seem to be abating, which will continue to impact YTLPOWR negatively. We cut our FY16- FY17 estimates by 16% each and hence lower price target to RM1.54/share from RM1.66/share and recommendation to MARKET PERFORM.

Dismal 3Q16 results. YTLPOWR reported yet another disappointing set of results in 3Q16 with 9M16 core net profit of RM549.9m making up only 63% of our FY16 full-year estimate and 65% that of market consensus. The negative variant was mainly owing to the continued poor earnings from PowerSeraya. There was no dividend declared during the quarter as expected.

A broad-base sequential decline… 3Q16 core profit fell 5% QoQ to RM176.5m from RM186.7m in the preceding quarter as revenue contracted 14% to RM2.24b. It was a broad-base earnings decline except for YES, which saw its losses at the pre-tax level narrowed to RM13.7m from RM57.6m in 2Q16. PowerSeraya posted the lowest quarterly PBT of RM5.7m, since the acquisition in early 2009, from RM43.6m with revenue plummeting by 19% while Wessex Water also posted lower PBT by 5% to RM229.4m. Meanwhile, the local IPPs registered a loss before tax of RM33.4m from PBT of RM149.9m as their PPA already expired while still incurring depreciation charges and overhead costs.

… with same trend on yearly comparison. Likewise, 3Q16 earnings plunged 21% YoY while topline declined 16% over the year. It was the same broad-base decline for all segments except YES, which saw reduced losses. YTD, 9M16 core profit declined to RM549.9m from RM711.7m in the corresponding period last year as revenue fell 11% to RM8.08b from RM9.08b. Besides narrowed losses at YES, Wessex Water managed to post 7% growth in PBT to RM711.9m from RM665.4m previously, partly due to the weakening of MYR against GBP.

Outlook. Although the strong SGD should benefit YTLPOWR, the electricity market in Singapore remains competitive with new capacity coming onstream; thus, earnings prospect remains challenging. While the PPAs for one of the two local IPPs, Paka Power Plant, has been awarded an extension from Mar 2016 to Dec 2018, it came with less lucrative terms. However, it has yet to sign the PPA extension as negotiation is still on going. Earnings prospect for YES is 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.

Downgraded to MARKET PERFORM. We cut FY16-FY17 estimates by 16% each mainly on the back of lowering PowerSeraya’s earnings assumption substantially given its challenging outlook. However, we have added back earnings contributions from Paka Power Plant for its PPA extension contract which we assumed will start in 2H 2016. We are rolling over our valuation base-year to FY17E and with the inclusion of local IPP valuation, its FD RNAV is reduced to RM1.71/share from RM1.84/share previously. Thus, our price target is cut to RM1.54/share from RM1.66/share after an unchanged 10% holdings company discount. As such, we downgrade the stock to MARKET PERFORM. Upside risks to our downgraded call include a sudden recovery by PowerSeraya. 

Source: Kenanga Research - 27 May 2016