YTLPOWR finally reported earnings, which beat estimates after 4th consecutive quarter of disappointments. However, the strong set of 4Q16 results was mainly led by deferred tax assets while the underlying businesses remained lacklustre as the problematic PowerSeraya was far from recovery. We remain cautious, especially for the Singaporean unit given the tough operating environment there. MARKET PERFORM and price target of RM1.54/share maintained.

4Q16 results above. Finally, YTLPOWR reported a strong set of 4Q16 earnings with FY16 core net profit of RM857.0m beating house/street’s estimates by 17%/7%. This was mainly due to higher associate incomes by 284% QoQ due to the increase in deferred tax credit on revaluation of PT Jawa Power Plant assets for tax purposes. However, we have adjusted the core earnings for a deferred tax asset of RM71.6m mainly for its subsidiary Wessex Water after the corporate tax rate in UK was reduced to 19% from 20%. A first and final NDPS of 10.0 sen was declared in 4Q16 (ex-date: 27 Oct; payment date: 15 Nov) which is the same as last year.

Results helped by deferred tax. Despite revenue dipping 4%, 4Q16 core profit jumped 74% sequentially to RM307.1m, mainly driven by the higher associate incomes mentioned above. Earnings from PowerSeraya remained weak with pre-tax margin of only 1.0% while YES’ pre-tax loss widened to RM109.4m from RM13.7m, despite higher revenue, due to higher opex. Losses at local IPPs reduced to RM13.7m from RM33.4m as their PPA have already expired but still incurring depreciation charges and overhead costs. Meanwhile, Wessex Water was the only performer with pre-tax profit rising 10% to RM251.8m from RM229.4m previously.

Underlying numbers remained weak. Likewise, 4Q16 core earnings jumped 48% YoY from RM207.1m in 4Q15 mainly due to the higher associate incomes mentioned above. However, the underlying business remained lacklustre with PowerSeraya earnings plunging from RM52.9m to RM7.7m while losses at YES widened from RM54.7m. YTD, FY16 core earnings, in fact, fell 7% to RM857.0m from RM918.8m, despite the 119% jump in associate income, due mainly to the fall in PowerSeraya earnings by 69% to RM93.7m from RM304.9m as well as the PPAs expiration of local IPPs which saw their earnings falling 14% to RM164.0m from RM189.8m.

Challenging outlook. Outlook for PowerSeraya remains challenging as the electricity market in Singapore remains competitive with new capacity coming on-stream. Meanwhile, although the GEN1 IPP Paka Power Plant has already been awarded a PPA Extension from Mar 2016 to Dec 2018, it has yet to sign the PPA Extension with TENAGA (OP; TP: RM17.50) 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.

Keep MARKET PERFORM. We maintain our FY17 estimates as the deferred tax assets in 4Q16 is a one-off event while we introduced FY18 numbers which we expect earnings to grow at 2% while we expect YES to remain loss-making. We retain our MARKET PERFORM call with unchanged price target of RM1.54/share which is based on 10% discount to its FD RNAV of RM1.71/share. Upside risks to our call include a sudden recovery by PowerSeraya.

Source: Kenanga Research - 26 Aug 2016