FY18 core profit of RM625.7m and 5.0 sen NDPS met expectations. Operationally, FY18 was a good year led by the resumption of Paka, improved results from Wessex Water and narrowed losses at YES. With earnings catalysts to be seen only in 3-4 years’ time when the two greenfield projects come into the system, its 49% share price appreciation prompted us to cut our call to MARKET PERFORM with an unchanged target price of RM1.10.

4Q18 matched expectations. 4Q18 results came within expectations with core profit rising 40% sequentially to RM211.3m, totalling FY18 core earnings to RM625.7m which beat our estimate by 4% but fell short of consensus by 2%. First and final NDPS of 5.0 sen (ex-date: 25 Oct; payment date: 13 Nov) also met our projection but was lower than the 7.86 sen paid in FY17 which included a 1-for-50 treasury share distribution, worth 2.86 sen and final NDPS of 5.0 sen.

Wessex Water led sequential growth. While revenue rose 7%, 4Q18 core profit jumped substantially by 40% QOQ to RM211.3m which was largely driven by Wessex Water on lower operating cost despite flattish top-line growth of 3%. Earnings of Wessex Water leapt by 30% to RM318.7m from RM244.4m in 3Q18 while Paka Power Plant’s PBT improved slightly to RM13.2m from RM9.0m. PowerSeraya continued to post weak earnings of merely RM2.0m in 4Q18 from RM12.2m despite revenue rising 11%. Meanwhile, losses at YES reduced slightly to RM25.6m from RM27.9m previously.

A good year operationally. YoY, despite revenue growing 8%, 4Q18 core income fell 5% from RM221.5m which was primarily due to taxation surplus of RM8.8m in 4Q17 against taxation charges of RM53.5m in 4Q18. Operationally, 4Q18 revenue rose 8% while PBT rose 15% to RM284.9m which was due to the resumption of Paka Power Plant as well as lower opex at Wessex Water as mentioned above. Likewise, FY18 core profit fell 10% from RM692.6m although revenue rose 8%, due to taxation doubling to RM226.4m from RM104.4m in FY17. However, at PBT level, earnings grew 6% on the back of Paka Power Plant’s PPA Extension, lower opex at Wessex Water and narrowed losses at YES.

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, come on-stream in 3-4 years’ time. For existing businesses, outlook for PowerSeraya remains challenging as the electricity market in Singapore remains competitive with generation capacity oversupply in the wholesale electricity market. Meanwhile, for Wessex Water, earnings are expected to be fairly flattish in GBP terms while YES will continue to be loss-making in the near term.

Downgrade to MARKET PERFORM after our upgrade to OUTPERFORM three months ago as the share price has risen to as high as RM1.27 (+69%) before retracing back to current price of RM1.09 or 45% gain. With earnings outlook remaining lacklustre until the two new greenfield projects start contributing in 3-4 years’ time, we believe all positive have already been priced-in; thus, we downgrade the stock to MARKET PERFORM with an unchanged target price of RM1.10, which is based on 10% discount to its SoP valuation. Risks to our downgrading include a sudden recovery by PowerSeraya and an unexpected turnaround at YES.

Source: Kenanga Research - 30 Aug 2018