While headline numbers were hugely impacted by deferred taxation for Wessex Water, FY21 core profit came in strongly, surging 21% to RM462.7m as two wildcards PowerSeraya and YES managed to consistently post substantially improved results in the past year. With an improved earnings outlook and attractive dividend yield of >7%, OP is maintained with a slightly revised TP of RM0.89.

FY21 results in line. After adjusting for RM608.9m deferred tax, FY21 core profit of RM462.7m is spot on our forecast but beat consensus slightly by 6%. The huge deferred tax was mainly due to the RM540.5m debit for re-measurement of deferred tax balance as the UK corporation tax is due to increase from 19% to 25%, effective 01 Apr 2023. The headline FY21 net loss was RM143.1m. Meanwhile, a 2nd interim NDPS of 2.5 sen (ex-date: 23 Sep; payment date: 12 Oct) was declared in 4QFY21, totalling FY21 NDPS to 4.5 sen which came below our forecast of 5.0 sen. In FY20, it declared a 1-for-16 treasury share distribution in 4QFY20, valued at 6.3 sen back then.

A weak sequential result with core profit falling 8% to RM116.9m from RM127.1m, despite revenue rising 15% over the quarter which was due to better revenue from PowerSeraya and Wessex Water. This was attributable to the earnings decline in PowerSeraya and Wessex Water by 59% and 34% as we believe the former was impacted by lower margin while the latter could be affected by higher depreciation given that the group’s depreciation has risen 12% QoQ. However, this weaker set of results were mitigated by higher local IPP earnings, continued narrowing YES losses and higher profit from investment holding on the back of fair value gains on investment properties.

Better set of PowerSeraya and YES numbers over last year. YoY, 4QFY21 core profit jumped 41% from RM82.7m, on the back of 30% hike in revenue, attributable to broad-based improvement for all business segments. PowerSeraya has turned around since 1QFY21 on improved business operating environment for the industry in Singapore. Meanwhile, Wessex Water posted higher earnings by 27% given lower allowance for impairment of receivables. YES saw its losses narrowing by more than half to RM17.9m from RM41.2m on higher subscriber base. YTD, FY21 core profit leapt 21% to RM462.7m from RM381.9m on the similar reasons as mentioned above.

A stable 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, the yet to be completed Tuaspring acquisition will help PowerSeraya capture more value from the value-chain, from generation to wholesale to distribution for better profit margins. Meanwhile, YES is expected to see improving results from better economies of scale from higher subscriber base. Post 4QY21 results, while we keep FY22 estimates unchanged, we launched our new FY23 forecasts with earnings expected to grow by 6%. FY22-23 NDPS are forecasted at 5.0 sen.

Better outlook is underappreciated; maintain OP. Since our rating upgrade three months ago, its share price has remained largely stagnant. Given its stable earnings outlook on the back of the sustainable turnaround in PowerSeraya and consistently improving YES performance in the past one year, we believe market is under- appreciating its improved outlook. As such, we continue to rate the stock an OP with a revised TP of RM0.89 from RM0.90 on valuation base roll-over, based on 20% discount to its SoP valuation. The stock is also supported by above average yield of 7%. Risks to our upgraded call are: (i) losses at YES worsening, and (ii) PowerSeraya failing to maintain its profitability.

Source: Kenanga Research - 9 Sep 2021