3QFY21 was yet another solid quarter with continued improvement from PowerSeraya and YES which seem sustainable given the improved business environment in Singapore for the former while higher subscribers base boost economies of scale for the latter. In view of better risk-reward proposition, we raise the stock to OP from MP with a higher TP of RM0.90. It also offers attractive yield of >7%.

9MFY21 beat expectations. At 81%/91% of house/street’s FY21 estimates, 9MFY21 core profit of RM345.8m came above expectations driven by sustained higher-than-expected PowerSeraya earnings and narrower-than-expected losses for the telco unit. In a surprise move, it declared an interim NDPS of 2.0 sen (first time since FY12) in 3QFY21 (ex-date: 14 Jun; payment date: 29 Jun) as it had only paid dividend or share distribution in the final quarter each year post FY12.

Lowest YES’ losses in two years. While revenue dipped 1%, 3QFY21 core profit rose 22% QoQ to RM127.1m thanks to continued narrowing losses at YES to RM27.1m from RM76.0m previously owing to better economies of scales as subscribers base increased (currently 1.3m subscribers) bolstered by partnership and collaborations with Shopee. However, PowerSeraya posted PBT which fell 54% to RM66.5m, from RM145.5m which included RM54.1m write-back of impairment of receivable arising from an appeal against a High Court’s decision. Ex-EI, PowerSeraya’s earnings still declined 27%, which was due to low demand during CNY period. Meanwhile, earnings for the local IPP and Wessex Water were fairly within expectations.

PowerSeraya’s earning recovery boosted earnings. YoY, 3QFY21 core profit leapt 24% from RM102.4m, while revenue rose 2%. The improved result was attributed to the turnaround at PowerSeraya given the improved business operating environment for the industry in Singapore. Besides, the improved set of results was also helped by YES’ narrowed losses abovementioned but it was offset by a lower earnings base for Wessex Waters on lower new tariff. However, interest expense declined 10% on lower cost of fund for Wessex Water’s bonds which coupons are inflation-linked benefitting from falling UK inflation rate. Similarly, YTD 9MFY21 core profit rose 16% to RM345.8m for the same period as above.

A better earnings outlook, primarily thanks to the recovery of PowerSeraya which we believe is sustainable given the improved business operating environment for the industry in Singapore. Furthermore, with the yet to be completed Tuaspring acquisition, it will help PowerSeraya capture more from the value-chain from generation to wholesale to distribution for better profit margins. The other wildcard YES is expected to see is improving results from better economies of scale from higher subscriber base. Post 3QY21 results, we upped FY21/FY22 estimates by 8%/5% to reflect improved PowerSeraya and YES’ outlook. However, we keep our dividend forecasts unchanged which implies earnings payout of 88%/92%

Better outlook; upgrade to OP. After seeing sustained improvement in PowerSeraya, we decided to reduce our targeted discount to SoP valuation to 20% from 30%. Thus, our TP is revised upward to RM0.90 from RM0.72. With improved risk-reward proposition, we upgrade YTLPOWR to OP from MP, which is also supported by above average yield of >7%. Risk to our upgrading call is losses at YES worsening while PowerSeraya fails to maintain its profitability.

Source: Kenanga Research - 31 May 2021