2Q17 results were disappointing mainly due to continued losses incurred at Paka on on-going dispute with TENAGA. On a positive note, losses at YES narrowed with the launch of 4D LTE while PowerSeraya posted 2nd consecutive quarter of improved results. As the Paka- TENAGA dispute is still ongoing, we decided to remove the IPP earnings assumption from our valuation equation. Thus, new price target is lowered to RM1.50/share. Still MARKET PERFORM with above average yield of 6-7%.

1H17 still below expectations. At 41%/42% of house/street?s FY17 full-year estimates, 1H17 net profit of RM313.3m missed estimates mainly attributable to cumulatively losses of RM52.1m posted by IPP Paka Power Plant arising from the dispute of PPA Extension. No dividend was declared in 2Q17 as expected as it only paid final dividend in 4Q since FY14.

A better sequential quarter operationally. In tandem with a 5% sequentially growth in revenue, 2Q17 core profit rose 14% to RM166.8m from RM146.5m in 1Q17 largely led by higher earnings from PowerSeraya by 69% while losses from YES narrowed substantially to RM15.4m from RM65.3m in 1Q17 with the launch of 4G LTE. However, earnings of Wessex Water fell 9% on the weakening of GBP. On the other hand, associate income also rose 18% to RM97.8m from RM82.9m previously.

But weaker performance from last year. However, 2Q17 earnings declined 11% YoY from RM186.7m in 2Q16 as revenue contracted 6% over the year as the local IPP Paka Power Plant had its last quarter of contribution in 2Q16 after the Gen1 PPA expired in end- 1Q16. Besides, Wessex Water also faced the same earnings weakness as GBP declined while earnings for PowerSeraya and YES improved for the same reasons mentioned above. 1H17 core profit contracted 16% to RM313.3m as revenue declined 18% from 1H16 as the main culprit was losses at Paka Power Plant that was offset by losses narrowing at YES.

Challenging outlook. Despite improving results, outlook for PowerSeraya remains challenging as the electricity market in Singapore remains competitive with new capacity coming on-stream. Meanwhile, the dispute between Paka Power Plant and TENAGA (OP; TP: RM17.50) is now pending the outcome from Court of Appeal. Earnings prospect for YES is set to be better judging from its growing subscriber base as well as the launch of 4G LTE service. For Wessex Water, earnings are expected to be fairly flattish in GBP terms, but it faces forex translation risk as the currency remains vulnerable given the Brexit issue.

Keeping MARKET PERFORM. As the Paka dispute is still ongoing, we decided to impute opex cost for the local IPP with no earnings contribution in FY17 but expect the PPA to be executed in FY18, thus we cut FY17 estimates by 10% and keep FY18 forecast unchanged. We also removed the local IPP?s valuation from the equation, hence the new FD RNAV is reduced to RM1.67/share from RM1.71/share. As such, our new price target is lowered to RM1.50/share from RM1.54/share. Maintain MARKET PERFORM. Upside risks to our call include a sudden recovery by PowerSeraya.

Source: Kenanga Research - 24 Feb 2017