FY20 results came below with 4QFY20 turning loss-making given a higher deferred taxation of RM162.4m for Wessex Water. Having said that, operationally, results were fairly inline. However, near-term earnings are still weak until its new assets’ earnings kick in, weighed by lower new rate for Wessex Water and Paka Power Plant expiring next June. With a lacklustre earnings outlook, the stock appears fairly priced. Thus, we keep MP on YTLPOWR at lower revised TP of RM0.64.

FY20 below expectations. At 52%/66% of house/street’s FY20 estimates, FY20 core profit of RM208.7m came in below expectations largely due to higher taxation which jumped 458% to RM193m in the 4QFY20, accounting for 65% of the full year tax expense of RM298m, owing to higher deferred tax of RM162.4m for Wessex Water as the UK corporate tax reverts to 19% for 2020-21 after a repeal of the previous legislation that reduced the rate to 17%. There was no cash dividend but it declared a distribution of treasury share based on 1-for- 16 (book closure: 28 Oct), based on share price of RM0.69, implying 6.3 sen dividend for FY20, against 5.0 sen NDPS paid last year.

4QFY20 in the red… 4QFY20 turned loss-making with core loss of RM88.9m on the back of 10% decline in revenue, largely due to the inflated RM162.4m deferred tax mentioned above. Besides, Wessex Water earnings also contracted 53% to RM71.5m due to the higher allowance for impairment of receivable of RM62.5m after a review of the potential impact from COVID-19. On a positive note, PowerSeraya posted lower losses by 55% owing to higher fuel oil tank leasing rates, higher retail and ancillary margins and lower finance costs while YES also saw losses narrowing slightly by 5% while local IPP posted flattish PBT of RM13.1m from RM14.1m as earnings are guaranteed by capacity payment.

...hit by higher deferred tax for Wessex Water. Similarly, the weaker YoY earnings for 4QFY20 against core profit of RM175.6m in 4QFY19 was largely due to the said deferred taxation and impairment of receivable together with a lower new rate for new regulatory period of 2020-2025 for Wessex Water. YES posted a PBT of RM10.0m last year as opposed to loss before tax of RM41.2m in 4QFY20. However, PowerSeraya’s losses narrowed by 24% for the reasons mentioned above while the local IPP also reported a higher PBT of RM3.5m from RM9.6m a year ago. YTD, FY20 core profit plunged 66% to RM208.7m from RM615.3m owing to the reasons mentioned.

The going remains tough. With the expected losses from PowerSeraya and YES, and weaker earnings from Wessex Water on new rate coupled with the local IPP’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 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 FY21 estimates by 22% mainly on lower new rate for Wessex Water and introduce new FY22 forecasts where we expect earnings to fall 12% on the local IPP expiration. However, we have yet to factor in earnings from the three new assets pending project completion and keep our forecast 5.0 sen NDPS unchanged which is likely to be paid in the form of share dividend as it will keep cash for asset acquisition. It remains as MP with a lower target price of RM0.64, based on unchanged 30% discount to its SoP valuation from RM0.65, post earnings revision. Upside risk to our call include a sudden turnaround at both PowerSeraya and YES.

Source: Kenanga Research - 1 Sept 2020