4Q19 results are fairly well on track with a pleasant surprise maiden profit from YES, and narrowed PowerSeraya’s losses bolstering earnings. However, earnings sustainability is crucial for YTLPOWR in the immediate term before its two greenfield projects come into the system in 3-4 years time. Upgrade the stock to OP at RM0.82 as recent heavy sell-down is overdone while it trades at -1.5SD 3-year mean with attractive yield of >7%.

4Q19 in line. 4Q19 core profit which rose 30% QoQ to RM175.6m came within expectations, with FY19 core profit of RM615.3m coming on the dot of our forecast but 12% below market consensus. A first and final NDPS of 5.0 sen (ex-date: 25 Oct; payment date: 13 Nov) was declared for FY19, which is the same payout in FY18.

PowerSeraya’s losses narrowed and a surprise turnaround at YES boosted sequential results. 4Q19 core profit jumped 30% QoQ to RM175.6m from RM134.8m in 3Q19 while revenue rose 6% over the quarter. The improved results were attributable to a sharp decline in pre-tax loss at PowerSeraya to RM22.4m from RM86.5m while YES posted its first ever PBT of RM10.0m from pre-tax loss of RM9.9m previously, due to higher revenue coupled with lower operating costs. Elsewhere, local IPP posted a lower PBT of RM9.6m from RM14.8m while Wessex Water also registered lower earnings by 6% to RM168.1m.

Earnings were still lower than last year. YoY, 4Q19 core profit contracted 19% from RM216.2m which was largely due to lower earnings from Wessex Water by RM155.9m owing to one-off pension credit recognised in 4Q18 while PowerSeraya was still profitable back then with PBT of RM3.6m. YTD, FY19 core income declined 11% to RM615.3m from RM690.6m, although revenue rose 10%, due largely to the loss-making PowerSeraya at the pre-tax level of RM242.1m, including RM70.5m impairment of receivable in 2Q19, from PBT of RM71.8m in FY18. However, the earnings decline was partly mitigated by losses at YES narrowing by 81% while local IPP posted improved results by 171% as the power plant resumed operations in end-1Q18 after being awarded the PPA Extension contract.

Sustainability of earnings is key going forward. While waiting for new earnings stream to start 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, PowerSeraya remains a wildcard, although with improved numbers in 4Q19 while YES has also turned around for the first time, earnings sustainability is still the key factor. In addition, Brexit also put pressure on Wessex Water due to forex volatility. For now, we keep our FY20 forecast and introduce FY21 estimates with a flattish earnings projection.

Sell-down overdone; upgrade to OUTPERFORM. Although earnings risk remains a key concern, we believe the heavy sell-down partly due to MCSI index rebalancing and lacklustre earnings outlook, is overly done as the Wessex Water value minus group’s net debt is worth RM0.73 per share, which is still higher than its current share price of RM0.685. In additional, there is a NDPS of 5.0 sen yielding >7% and the stock is trading close to its -1.5SD 3-year mean of 9x. As such, we upgrade the stock to OUTPERFORM from MARKET PERFORM with a lower target price of RM0.82, after adjusting for its latest FY19 cash position, from RM0.88 based on unchanged 20% holding company discount to its RNAV. Risks to our upgrade include (i) PowerSeraya losses worsening and (ii) YES turns lossmaking again.

Source: Kenanga Research - 30 Aug 2019