Share price of YTLPOWR has been charting new lows on concerns over near-term earnings while new earnings streams could take time to crystallise. However, we believe it is now oversold, having plunged 19% YTD, with stable fundamental backed by key concession assets. Value of Wessex alone minus group’s debts exceeds the current share price. And, it pays 5.0 sen dividend which translates to >7% yield. Keep OP with revised TP of RM0.80.

Wessex Water faces risk of tariff cut. YTLPOWR’s key earnings contributor Wessex Water, which experienced lower earnings in FY19, may see a lower return of rate, currently c.5%, over its asset base under the new regulatory period (RP) in 2020-2025 where it plans a GBP1.2b investment program over this period. Having said that, it still expects to generate similar earnings level as current net profit of c.GBP100m a year in the new RP as the growth in asset base should be sufficient to offset the cut in tariff rates in a full 5-year basis. As such, we may see lower earnings in the initial year on lower tariff before improving gradually over the later years as sales volume increases. Nonetheless, in MYR denomination, earnings from this unit are expected to be impacted by forex volatility owing to the uncertainty caused by Brexit.

PowerSeraya and YES to see further weaker earnings. After a substantial reduction in pre-tax loss in 4QFY19 due to higher volume, PowerSeraya expects to see widening losses again at least in the next two quarters before seeing improvements when the vesting contract which ends next year and “take-or-pay” gas contract expires in 2023. Meanwhile, the mobile unit posted a surprise pre-tax profit of RM10.0m in 4QFY19 thanks largely to the positive contributions from 1BestariNet. However, the non-renewal of contract for 1BestariNet by the Ministry of Education will put the unit back to the red again as the current 500,000 subscriber base of YES is insufficient to turn the unit around. Nonetheless, taking cue from recent failed Telenor-Axiata merger talks, there is possibility that this business segment may be on the lookout for M&A possibility.

Group earnings expected to be lower in the near term. With the expected weaker earnings from Wessex, PowerSeraya and YES, coupled with the Paka’s Extension PPA contract expiring in June 2021, near-term earnings are set to be lacklustre. Meanwhile, the two greenfield projects, namely 45%-owned 554MW oil shale-fired Attarat Power Plant in Jordan is scheduled to start operation in mid-2020, while the 80%-owned 2x660MW coal-fired PT Jati Power Plant in Indonesia is still pending financial close and once approved will take at least four years to build. In view of continued losses at PowerSeraya and the contract loss from 1BestariNet, we cut FY20/FY21 earnings estimates by 17%/14%. However, NDPS is maintained at 5.0 sen which could be distributed in a quarterly basis vs. once a year currently.

Oversold; OP reiterated. Although facing rather bleak earnings outlook, we believe YTLPOWR is a bombed-out stock having fallen 19% YTD. The last time we see such price level of RM0.675 was twenty years ago during the 1998 Asian Financial Crisis. Furthermore, based on our estimated Wessex Water’s regulated capital value (RCV) of GBP2.87b minus group debt of RM9.97b, it is worth RM0.71 which is still higher than the current price. In addition, it offers above average yield of >7%. As such, we maintain our OUTPERFORM rating at revised target price of RM0.80 from RM0.82 previously. Risks to our call include both PowerSeraya and YES losses worsening.

Source: Kenanga Research - 7 Nov 2019