While 3Q17 results came slightly below expectations, the settlement over the Paka-TENAGA dispute should see earnings recovery next year as the new PPA Extension will start to take effect in September. Having said that, YTLPOWR’s earnings prospects remain challenging given the volatile PowerSeraya earnings, the weak GBP-priced Wessex Water income and YES has yet to be profitable. We maintain MARKET PERFORM rating with unchanged price target of RM1.50/share.

3Q17 slightly below. At 68%/66% of house/street’s FY17 estimates, 9M17 net profit of RM473.9m came slightly below expectations, although we expect a seasonally strong 4Q17. This was attributed to (i) a higher pre-tax loss for the local IPP in 3Q17, and (ii) weaker than expected Wessex Water earnings. No dividend was declared in 3Q17 as expected as it only paid a final dividend in 4Q since FY14.

A weak broad-base sequential quarter. 3Q17 net profit fell 4% QoQ to RM160.6m on the back of 3% contraction in revenue. The decline in earnings was across the business segments with PowerSeraya as the main earning dampener as the segment’s pre-tax profit declined 35% or RM20.5m. Pre-tax loss at Paka Power Plant widened by 44% or RM11.5m as the IPP was still not operational since the PPA expired in Sep 2015. Meanwhile, earnings of Wessex Water slid 2% while losses at YES increased slightly by 1%.

A mixed performance from last year. Although 3Q17 earnings declining 9% YoY from RM176.5m in 3Q16, YTLPOWR posted better results operationally as the decline in earnings was mainly driven by (i) higher taxation of 64% or RM9.8m and (ii) pre-tax at Wessex Water fell 8% or RM17.2m as GBP weakened against MYR. In fact, PowerSeraya’s earnings surged 581% on higher fuel prices and lower opex while associate income rose 27% from a year ago. Nonetheless, YTD 9M17 core earnings contracted 14% to RM473.9m while revenue slumped 11% over the period. The main culprit was Paka Power Plant as it was unable to execute the PPA Extension over the dispute with TENAGA. This has resulted the IPP to post a pre-tax profit of RM89.7m from a pre-tax profit of RM177.6m in 9M16.

Paka’s dispute settled, but outlook remains challenging. Despite improving results, outlook for PowerSeraya remains challenging as the electricity market in Singapore remains competitive with new capacity coming on-stream. Meanwhile, 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. Earnings prospect for YES is set to be better judging from its growing subscriber base as well as the launch of 4G LTE service. All in all, we cut FY17-FY18 estimates by 3% each on the back of (i) higher losses of Paka in FY17, (ii) lower Wessex Water earnings on lower forex assumption, (iii) include Paka earnings from Sep 2017 to Jun 2021 as the dispute with TENAGA finally solved.

Still MARKET PERFORM. We maintain our target price of RM1.50/share which is a 10% discount to its FD RNAV, after we (i) reincluded Paka’s valuation, (ii) rolled over valuation base-year to FY18. We also retain our MARKET PERFORM on the stock for its above average yield of 6%-7%. Upside risks to our call include a sudden recovery by PowerSeraya and unexpected turnaround at YES.

Source: Kenanga Research - 26 May 2017