While FY17 earnings were well within expectations, the dividend cut in 4Q17 was not a total surprise given the two new greenfield projects. As such, forward earnings payout is set to be lower until the projects are completed in 3- 4 years’ time. Nonetheless, underlying earnings should improve in FY18 with Paka’s PPA Extension Contract to start in September and better prospects at YES, albeit weaker GBP-priced Wessex Water income and challenging PowerSeraya earnings. YTLPOWER remains MP with unchanged price target of RM1.50.

FY17 on the spot. 4Q17 core profit of RM199.5m came within expectations, tallying FY17 core earnings to RM673.4m which is smacked on the dot of our estimate but 4% below market consensus. However, NDPS of 5.0 sen declared in 4Q17 (ex-date: 24 Oct; payment date: 10 Nov) was disappointing, together with the 1-for-50 treasury share distribution, worth 2.86 sen (ex-date: 24 Oct) full-year FY17 NDPS will be 7.86 sen which is lower than our 10.0 sen assumption and the 10.0 sen paid in FY16.

4Q17 results helped by deferred tax. The strong 24% sequential jump in 4Q17 earnings was largely driven by RM62.9m deferred tax credit recognised for Wessex Water as the reduction of UK corporate tax to 17% from 18%. At pre-tax level, 4Q17 earnings grew 4%, on the back of 8% increase in revenue, which was attributed to losses at Paka Power Plant, which narrowed by 61% or RM22.9m. However, pre-tax profits of PowerSeraya weakened by 34%, Wessex Water by 2% while pre-tax loss at YES widened to RM22.7m from RM15.6m previously.

Weaker performance from last year. 4Q17 and FY17 core profits declined 38% and 23% YoY, respectively, largely due to: (i) higher losses at Paka Power Plant after the PPA expired in Sep 2015, (ii) lower Wessex Water earnings due to the strengthening of MYR against GBP, and (iii) higher associate income in 4Q16 due to the increase in deferred tax credits on revaluation of PT Jawa Power Plant assets for tax purposes. However, earnings of PowerSeraya improved on lower operating and interest expenses while losses at YES narrowed on higher subscriber base with the launch of the nationwide 4G LTE services.

Paka’s earnings to improve. With the signing of PPA Extension, Paka Power Plant is scheduled to recommence on 1st of Sep, which should help to boost YTLPOWR’s earnings. Likewise, earnings prospect for YES is set to be better judging from its growing subscriber base as well as the launch of 4G LTE service. However, 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 lingering Brexit issue.

Still MARKET PERFORM. While we maintain our FY18-FY19 earnings estimates, we cut FY18-FY19 NDPS assumptions to 5.0 sen each from 10.0 sen previously as the group needs to conserve cash for its two new greenfield projects, namely PT Tanjung Jati coal-fired power plant in Indonesia and Attarat Power’s oil shale-fired power plant in Jordan, over the next 3-4 years. Having said that, we keep our price target of RM1.50/share which is a 10% discount to its FD RNAV. The stock remains a MARKET PERFORM for its decent yield of 3-4%. Upside risks to our call include a sudden recovery by PowerSeraya and unexpected turnaround at YES.

Source: Kenanga Research - 30 Aug 2017