YTLPOWR reported a sub-par 1Q19 results which saw earnings falling 38% QoQ to RM130.9m as PowerSeraya posted its first losses since YTLPOWR acquired the firm almost 10 years ago. On the flipside, losses at YES narrowed on lower opex. With earnings catalysts are to be seen only in 3-4 years’ time when its two greenfield projects come into the system, we believe the stock is fairly valued currently. Maintain MP at RM1.05.

1Q19 disappointing. 1Q19 results missed expectations with core profit plunging 38% sequentially to RM130.9m, making up only 20%/19% of house/street’s FY19 estimates, owing to losses at PowerSeraya due to lower vesting contract level, lower retail non-fuel and tank leasing margin. No dividend was declared in 1Q19, which was expected.

PowerSeraya the earnings dampener. 1Q19 core profit plummeted 38% QoQ to RM130.9m from RM211.3m in the preceding quarter despite revenue inching up 1% over the quarter. The decline in earnings was primarily due to PowerSeraya, which reported pre-tax loss of RM15.9m, the first loss since the initial earnings inclusion back in 3Q09, from pre-tax profit of RM2.0m in 4Q18. The loss was due to the abovementioned reasons. On the positive note, YES reported much lower pre-tax loss of RM8.3m, the lowest losses in two years, against RM25.6m in 4Q18, due to lower operating cost. Elsewhere, earnings for Paka Power Plant and Wessex Water were fairly in line.

Better YoY results as Paka’s PPA extended. While PowerSeraya earnings were hit by abovementioned reason, the PPA Extension Contract at Paka Power Plant helped to boost earnings from 1Q18, which saw core earnings rose 4% YoY from RM126.3m with revenue growing 9% over the year. Paka Power Plant posted pre-tax profit of RM14.1m from pre-tax loss of RM18.2m previously. In fact, PowerSeraya registered pre-tax profit of RM26.4m in 1Q18. Meanwhile, Wessex Water’s earnings fell 9% while losses at YES narrowed from RM17.3m to RM8.3m in 1Q19.

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.

In the price, MARKET PERFORM maintained. Although share price fell 12% in the past three months since we downgraded the stock to MARKET PERFORM, valuations for YTLPOWR remain unattractive given the lacklustre earnings outlook while this poor set of results will dampen sentiment further. We cut FY19-20 estimate by 4-1% solely on PowerSeraya to reflect the poor 1Q19 results. As such, new SoP valuation is reduced to RM1.15 from RM1.24 previously. With unchanged 10% discount to its SoP valuation, our target price is lowered to RM1.05 from RM1.10. It remains as MARKET PERFORM.

Risks to our call include (i) a sudden recovery by PowerSeraya and (ii) an unexpected turnaround at YES.

Source: Kenanga Research - 26 Nov 2018