Despite the resumption of Paka Power Plant, 2Q18 results were disappointing owing to interest expense which continued to remain elevated leading to the weakening of Wessex Water’s earnings while losses at YES widened. Hence, we cut FY18-FY19 estimates further by 25-26%. Going forth, earnings prospect remains lacklustre until two greenfield projects come online after 2020. It remains MARKET PERFORM with revised price target of RM1.25/share.

2Q18 below expectations. YTLPOWR reported 2Q18 result which missed estimates with 1H18 core profit of RM274.5m making up only 32%/36% of house/street’s FY18 estimates. This was owing to: (i) interest expense continued to stay elevated at RM263.3m, +34% YoY, which led to earnings declined in Wessex Water, and (ii) losses at YES which widened by 14% QoQ to RM20.1m. No dividend was declared in 2Q18, as expected.

A mixed sequential quarter. Although 2Q18 core profit of RM135.7m dipped 2% QoQ due to the abovementioned let-down, the latest quarterly results showed improvement in the power business where (i) local IPP turned profitable at RM14.4m from pre-tax loss of RM18.2m on the resumption of Paka Power Plant last September, and (ii) pretax profit of PowerSeraya grew 12% to RM29.6m. On the other hand, associate incomes rose 8% to RM103.3m from RM95.6m previously.

Weaker earnings vs. last year. On a YoY comparison, earnings of 2Q18 and 1H18 declined 17% and 11% from RM163.1m and RM310.0m, respectively, although revenue rose 7% and 9% from last year. There was a broad-base decline in earnings across all business segments except the local IPP on the recommencement of PPA Extension as mentioned above. Similarly, PowerSeraya reported 50% and 40% plunge in earnings due to lower margins for electricity sales and oil tank leasing coupled with higher finance cost. Wessex Water saw profit sliding 7% and 8% on the abovementioned reason while YES’ losses widened by 30% in 2Q18 but 1H18 losses were reduced by 53%.

The going remains tough in the near term. Earnings prospects remain challenging in the immediate term before the 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, to come on-stream after 2020. In all, we cut FY18/FY19 estimates by 25%/26% to account for higher interest cost and losses at YES for the abovementioned reasons. In addition to this, we trimmed Paka Power Plant earnings for FY19 as we believe our earlier assumptions were too optimistic. However, we keep our NDPS assumption of 5.0 sen.

Still MARKET PERFORM. Post earnings revision, our target price is reduced slightly to RM1.25/share and RM130/share which is based on unchanged 10% holding company discount to its FD RNAV of RM1.36/share. The stock remains a MARKET PERFORM for its decent yield of c.4%. Upside risks to our call include a sudden recovery by PowerSeraya and unexpected turnaround at YES.

Source: Kenanga Research - 26 Feb 2018