Reported a strong 1QFY21 core profit of RM115.2m, although exceeded our estimate, is unlikely to sustain as the surprise profit from PowerSeraya is not sustainable. Operationally, the results were fairly satisfactory. Having said that, 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. Thus, we keep MP on YTLPOWR with a revised TP of RM0.67.

1QFY21 inline. At 35%/38% of house’s/street’s FY20 estimates, we consider 1QFY21 core profit of RM115.2m as matching our expectation as the surprise pre-tax profit of RM36.2m from PowerSeraya due to a low fuel price environment, is not sustainable. No dividend was declared in 1QFY21 as expected as it only pay final dividend in the 4Q yearly.

Back to profitability sequentially. 1QFY21 returned to the black with core profit of RM115.2m from loss of RM88.9m in the preceding quarter which was hit by higher deferred tax of RM162.4m for Wessex Water as the UK corporate tax reverted to 19% for 2020-21 after a repeal of the previous legislation that reduced the rate to 17%. Operationally, Paka Power Plant posted loss before tax of RM1.8m from PBT of RM13.1m given a one-off write-down of inventories while PowerSeraya saw its first profit since 1QFY19 for the abovementioned reason. Earnings of Wessex Water normalised, jumping 83% as there was a RM62.5m allowance for impairment of receivable recorded in 4QFY20. However, its Mobile unit’s losses widened further to RM69.6m from RM41.2m previously.

Comparable YoY earnings. Despite revenue falling 15%, 1QFY21 core profit rose 13% from RM101.6m in 1QFY20 primarily due to lower interest expense by 20% or RM59.1m. Operationally, PBT was fairly flattish at RM108.9m. The earnings fall in Paka Power Plant as mentioned above and Wessex Water due to lower new tariff was offset by the surprise PBT of PowerSeraya while the loss for the Mobile unit was flat at RM69.6m.

The going remains tough. With the expected losses from PowerSeraya and Mobile unit, 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 green-field 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.

Near term negatives priced in but still a MP. While we keep our estimates unchanged as we believe the strong 1QFY21 is not sustainable as the surprise PowerSeraya profit will not repeat, we upgraded our target price to RM0.67 from RM0.64 after we updated the actual FY20 balance sheet from Annual Report that changed the FY21 cash position. Our target price is still a 30% discount to its SoP valuation. We continue to rate the stock as MP as near-term negatives should have been priced in. It is supported by a c.7% dividend yield. Upside risk to our call include a sudden turnaround at both PowerSeraya and YES.

Source: Kenanga Research - 27 Nov 2020