1QFY20 results were a big let-down, albeit expected a weak result, as the losses from PowerSeraya and Telco Business were bigger than expected. Losses from these two segments are expected to prolong, especially for PowerSeraya as vesting contracts are expiring. As such, FY20 can be viewed as a transitional year before the Jordanian Power Plant starts in early FY21. Weighed by a bleak earnings outlook, we cut the stock to MP from OP with revised TP of RM0.70.

1QFY20 missed expectations. At 18%/19% of house/street’s FY20 estimates, 1QFY20 core profit of RM101.6m came in below expectations owing to the bigger-than-expected losses at PowerSeraya and Telco Business as some of the former’s vesting contracts were expiring while the latter turned loss-making again as contract for 1BestariNet was not renewed by the Ministry of Education. No dividend was declared during the quarter as it pays only one dividend in final quarter of the year.

Hit by PowerSeraya and Telco Business again. Headline net profit in 1QFY20 included a write-off of RM24m under PowerSeraya for high sulphur grade fuel oil no longer permitted for use in the island state. Ex-EI, 1QFY20 core profit plummeted 42% QoQ to RM101.6m from RM175.6m in 4QFY19 while revenue dipped slightly by 3%. The declined earnings were attributable to losses widening in PowerSeraya and the loss of 1BestariNet contract as mentioned above. We understand that under the vesting contract, PowerSeraya was permitted to claim 18% vesting level of its committed LNG volume from 22% last year. For the Telco Business, the losses were solely from YES due to its lower subscriber-base of half a million.

Wessex Water and local IPP earnings were alright. YoY, 1QFY20 core profit declined 27% from RM139.1m in 1QFY19, despite revenue rising 6% to RM2.96b from RM2.80m previously, largely due to the same reasons of widening losses for PowerSeraya and YES. The increase in revenue was primarily due to higher revenue from PowerSeraya by 15% or RM221.6m on higher sales of fuel oil and higher volume of electricity sold. On the other hand, pre-tax profit for Paka Power Plant was fairly flattish at RM13.7m from RM14.1m while Wessex Water also saw a slight decline in profit before tax by 3% to RM195.0m from RM200.5m due to higher opex.

Earnings expected to trend lower in FY20. 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.

Bleak outlook for FY20; cut to MP. Post-results, we cut FY20/FY21 estimates by 12%/18% as losses for PowerSeraya and YES are expected to further widen. But, keep 5.0 sen NDPS for both FY20/FY21. On the other hand, we have yet to factor in Attarat Power Plant in FY21E pending completion of the power plant. Given the bleak earnings outlook for FY20 which would affect its near-term price volatility, we decided to widen the holding company discount to 30% from 20% which lead to a lower target price of RM0.70 from RM0.80. Thus, we cut the stock to MP from OP, which is supported by an above average yield of c.7%. Upside risks to our call include a sudden turnaround at both PowerSeraya and YES.

Source: Kenanga Research - 27 Nov 2019