3QFY20 results came below our expectations given the decline in Wessex Water’s earnings on higher sewerage costs. However, it was a better sequentially on narrowed losses at PowerSeraya and YES. However, the telco business is getting competitive with price wars which may add pressure on YES. With a lacklustre earnings outlook, the stock appears fairly priced. Thus, we keep MP on YTLPOWR at revised TP of RM0.65.

9MFY20 missed our forecast. At 63%/88% of house/street’s full-year FY20 estimates, 9MFY20 core profit of RM297.7m came in below our expectation, but likely above market consensus, due to weaker Wessex Water’s earnings on higher sewerage costs owing to inclement weather causing extra costs to unfreeze frozen pipes. No dividend was declared during the quarter as it only pays dividend once in the final quarter of the year.

A better sequential quarter in 3QFY20. Despite revenue sliding 7% to RM2.59b, 3QFY20 core profit rose 9% QoQ to RM102.2m from RM94.0m given the narrowed losses at PowerSeraya and YES. PowerSeraya saw its pre-tax loss lowered by 22% to RM37.7m owing to higher fuel oil tank leasing rate, higher retail and ancillary margin while the narrowed pre-tax loss at YES by 60% to RM43.3m was expected as its subscriber base doubled to 1m from 0.5m as reflected by a 51% jump in revenue. However, Wessex Water reported 19% decline in PBT to RM152.6m given the additional sewerage costs mentioned above while revenue only dipped slightly by 1%.

Wessex Water and Telco business dragged yearly earnings lower. YoY, 3QFY20 core profit declined 24% from RM134.8m while 9MFY20 core profit contracted 32% from RM439.7m given the higher sewerage costs mentioned above as well as the absence of 1BestariNet’s earnings this year as its contract was not renewed by the Ministry of Education. Meanwhile, losses at PowerSeraya narrowed YoY merely due to the abovementioned reasons. On the other hand, despite falling revenue on lower energy payment, earnings of local IPP Paka Power Plant were fairly flattish on guaranteed capacity payment.

Forward earnings remain lacklustre. With the expected weaker earnings from Wessex Water, 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 greenfield 45%- owned 554MW oil shale-fired Attarat Power Plant in Jordan is expected to be delayed from the scheduled COD in June 2020 on lockdown while the 80%-owned 2x660MW coal-fired PT Jati Power Plant in Indonesia is still working on its financial close. Lastly, the completion of the SGD331m acquisition of Tuaspring’s assets is expected to be concluded soon.

Negatives should have been priced in but still a MP. Post-results, we cut FY20/FY21 estimates by 14%/11% on: (i) higher sewerage costs in 3QFY20 and (ii) widened YES losses dampened by price wars. However, we have yet to factor the three new assets pending project completion and keep our forecast 5.0 sen NDPS unchanged. With the relaxation of lockdown, we believe stock price volatility would ease; thus, we have reverted our valuation method back to earningsbased SoP from PBV. As such, our new target price is RM0.65, which is based on 30% discount to its SoP valuation, from RM0.57 based on -2SD PBV 5-year mean of 0.63x. It remains a MP which is supported by attractive yield of c.7%. Upside risk to our call include a sudden turnaround at both PowerSeraya and YES.

Source: Kenanga Research - 17 Jun 2020