1HFY22 core profit of RM65.8m missed expectations on disappointing PowerSeraya’s results which was hit by higher fuel cost. Given the rising fuel environment, near term is likely to see earnings volatility at PowerSeraya. Having said that, the power business operating environment in Singapore has improved and the current high fuel environment is unlikely to sustain over the long term. Maintain OP with slightly lower TP of RM0.87. In addition, the stock also offers attractive dividend yield of >7%.

2QFY22 results below expectation… With core profit of RM1.7m only tallying 1HFY22 core profit to RM68.0m which made up 29%/19% of house/street’s FY22 estimates. This was mainly due to disappointing PowerSeraya results with pre-tax profit plunging 81% QoQ to RM14.2m owing to higher fuel cost given rising fuel prices. No dividend was declared during the quarter.

…as PowerSeraya hit by rising fuel costs. 2QFY22 core profit plummeted to RM1.7m from RM35.4m in the preceding quarter, despite revenue jumping 46% due to higher pool price at PowerSeraya. However, the sharp decline in bottomline was also attributed to PowerSeraya as mentioned above. Besides rising fuel costs, not helping was the gas supply issue in Indonesia, PowerSeraya had to switch to oil generator which came with higher cost than gas fuel. On a positive note, mobile unit YES reported yet another set of improved results with pre-tax loss narrowed by half due to better economies of scales.

CSR cost also impact earnings. On similar reason of higher fuel costs which dampened PowerSeraya, this led to 2QFY22 and 1HFY22 core profit falling 98% and 69% to RM1.7m and RM68.0m from RM104.4m and RM218.7m respectively. In addition, the COVID-19- related CSR program under its Investment Holding Activities segment also impacted earnings negatively. On the other hand, pre-tax loss for YES had narrowed by 78% and 65% to RM16.4m and RM50.6m in 2QFY22 and 1HFY22, respectively.

A stable earnings outlook, although PowerSeraya is open to earnings volatility given the rising oil price environment, we still believe the recovery for PowerSeraya is sustainable given the improved business operating environment for the industry in Singapore while YES is expected to see improving results from better economies of scale from higher subscriber base. On the other hand, with RM2.72b cash in hand from the disposal of ElectraNet, we believe YTLPOWR will continue to look out for new investment and in the past, the YTL Group has always expanded during economy downturn. Meanwhile, we cut FY22/FY23 earnings forecast by 41%/13%, respectively, solely for adjustment on PowerSeraya, post 2QFY22 results.

Reiterate OP for its good value. We remain optimistic about YTLPOWR’s earnings prospects on the back of the sustainable turnaround in PowerSeraya and consistent improvement in YES performance in the past one year. As such, we continue to rate the stock an OP with a lower TP of RM0.87 from RM0.89 previously, based on unchanged 20% discount to its SoP valuation. In addition, 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 - 25 Feb 2022