1QFY22 core profit of RM65.8m missed expectations on CSR costs as well as higher-than-expected taxation. However, this is not alarming. With the two wildcards PowerSeraya and YES consistently improving their results, we believe the stock is underappreciated by the market. In addition, the stock also offers attractive dividend yield of >7%. Thus, maintain OP at RM0.89.

1QFY22 underperformed with core profit contracting 44% sequentially to RM65.8m, which accounted for only 15%/16% of house/street’s FY22 estimate, mainly due to a COVID-19-related CSR program under its Investment Holding Activities segment while effective tax rate of 49% was much higher than our assumption of 24%. No dividend was declared in 1QFY22 as expected.

A weak sequential result with core profit plunging 44% to RM65.8m from RM116.9m, despite revenue rising 16% on higher revenue from PowerSeraya and Telco unit. The decline in earnings was attributable to the CSR cost mentioned above, higher subscriber acquisition cost for YES as subscriber base increased, while local IPP Paka Power Plant still incurred operating cost post PPA expiry. However, this was partly mitigated by Wessex Water’s earnings normalisation and higher earnings by PowerSeraya to RM75.4m from RM27.1m on its effective hedging position against a rising fuel cost environment.

PowerSeraya and YES continued to show positive numbers. While 1QFY22 core profit declined 42% YoY from RM114.3m in 1QFY21 which was due to the similar reasons for sequential results review, PowerSeraya and YES continued to show improvement. Earnings for PowerSeraya doubled YoY and it has turned around since 1QFY21 on improved business operating environment for the industry in Singapore. Meanwhile, we understand that YES subscriber base has now surpassed the 3m mark from >1m last year; thus its loss before tax was reduced by half with revenue rising 170%.

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 1QY22 results, we cut FY22E CNP by 12% to reflect the CSR cost as well as imputing higher taxation rate assumption of 28% from 24% but we keep FY23 estimates unchanged. FY22-23 NDPS are forecasted at 5.0 sen each.

Maintain OP as improved outlook is under-appreciated. Given its stable earnings outlook on the back of the sustainable turnaround in PowerSeraya and consistent improvement in YES performance in the past one year, we believe the market is under-appreciating its improved outlook. As such, we continue to rate the stock an OP with an unchanged TP of RM0.89, 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 stay profitable.

Source: Kenanga Research - 26 Nov 2021