3Q18 was another disappointment on weak earnings of Paka and PowerSeraya while losses at YES widened further. Shares were heavily bashed down post GE 14 on political risk concerns. However, we believe it is overdone as earnings are largely offshore driven. In fact, Wessex Water minus group’s debts alone is worth RM0.83/share. Trading at historical low of -2SD 3-year mean, we upgrade YTLPOWR to OUTPERFORM with target price of RM1.10.

3Q18 still below expectations. YTLPOWR reported yet another disappointing quarter in 2Q18, which missed estimates with 9M18 core profit of RM413.6m making up only 64%/60% of house/street’s FY18 estimates. This was owing to weaker-than-expected earnings from: (i) Paka Power Plant, which fell QoQ by 38% or RM5.4m, (ii) PowerSeraya dropped QoQ by 59% or RM17.4m, and (iii) YES as losses widened further by 39% or RM7.8m. No dividend was declared in 2Q18, as expected.

A flattish sequential quarter. Despite revenue dipping 2% QoQ to RM2.59b, 3Q18 core profit rose slightly by 2% to RM139.1m from RM135.7m in 2Q18 largely helped by the recovery of Wessex Water’s earnings on higher price coupled with lower opex which offset the abovementioned weaker earnings from Paka Power Plant and PowerSeraya as well as wider losses at YES. On the other hand, associate income dropped marginally by 1% to RM102.4m from RM103.3m previously.

Weaker earnings than last year. On a YoY comparison, earnings of 3Q18 and 9M18 declined 14% and 12% from RM161.2m and RM471.1m, respectively, although revenue rose 9% each from last year. This was mainly attributable to the local IPP where the PPA Extension Contract only recommenced last September. PowerSeraya was also another earnings drag, which saw earnings contracted sharply by 68% in 3Q18 and 49% in 9M18 owing to tough business environment coupled with the strengthening of MYR against SGD. On a positive note, Wessex Water performed better on higher price coupled with lower operating costs while losses at YES also reduced from last year on lower operating cost incurred.

Shares were sold-down heavily. In all, we cut FY18/FY19 estimates by 7%/5% to account for lower earnings from Paka and PowerSeraya and higher losses from YES. However, we keep our NDPS assumption of 5.0 sen. On the other hand, YTLPOWR faced heavy sell-down, especially post GE14, which saw its share prices tanking 42% YTD as the YTL Group is one of the consortium members building the KL-Singapore High Speed Rail which is now under review by the new government. While there is political risk at this juncture, we believe the sell-down is overdone as its earnings are mainly offshore driven.

Upgrade to OUTPERFORM. Post earnings revision and change of valuation base year to FY19, our new target price is RM1.10 from RM1.25 based on unchanged 10% holding company discount to its FD RNAV. In fact, Wessex Water minus group’s net debt is worth RM0.83/share which is higher than current price of RM0.75. Thus, we upgrade the stock to OUTPERFORM from MARKET PERFORM for its deep valuation, which is now at historical low of -2SD 3-year mean. Risks to our upgrading call include a sudden recovery by PowerSeraya and unexpected turnaround at YES.

Source: Kenanga Research - 25 May 2018