INVESTMENT HIGHLIGHT

• YTL’s 1HFY17 earnings of RM298m missed estimates

• Cement division still facing excess capacity and price competition

• Utilities division saw improvements on sequential basis

• Maintain NEUTRAL at a lower SOP-derived TP of RM1.30/share (from RM1.50/share)

Missed estimates. YTL reported net profit of RM148m for its 2QFY17, bringing 1HFY17 earnings to RM298m. This is below expectations accounting for 30% of our FY17F (no consensus estimate available). 2QFY17 earnings were largely flat quarter-on-quarter, but the shortfall against our forecast came from weaker than expected cement earnings.

Utilities unit improved. YTL’s utilities division (accounts for 63% of group pretax) delivered improved results, particularly from Power Seraya. Despite the overcapacity in Singapore power generation, earnings improved 69%qoq mainly due to lower interest and operating expense, while revenue also grew by 9%qoq. Rates would have stabilised given that the last major capacity addition was in 1Q16 i.e. Hyflux’s ~400MW Tuaspring plant, but gencos have committed to longterm, take-or-pay piped gas supply from Indonesia and Malaysia up till 2020, which means players are unlikely to adjust generation meaningfully in the near-term to balance supply-demand.

Power Seraya benefits from vesting volumes sold to Singapore Power Services as this is on a cost plus basis, hence guarantees profit margins which is valuable in the current situation. Only the three largest gencos get to contribute to vesting volumes, which accounts for at least 25% of demand in the country. Other than this, Power Seraya is also supported by non-power businesses (accounts for ~4% of revenue) e.g. steam supply which comes at almost no additional cost as this is a by-product of its existing power plants.

Non-utilities business. The property investment and development division saw improvements in earnings given better site progress from The Fennel project. Higher pretax sequentially was mainly due to a fair value loss on investment property last quarter. Meanwhile, the construction unit saw better earnings (+37%qoq) as a result of improved margins and higher revenue recognition of construction contracts. The cement unit is facing short-term margin pressure as the industry faces temporary excess capacity and price competition.

Forecasts trimmed. We trim our FY17F18F earnings by 36%/35% to factor in mainly lower cement volume and margin forecast given the competitive environment currently.

Recommendation. We maintain our NEUTRAL call but lower our TP to RM1.30/share from RM1.50/share.

Source: MIDF Research - 24 Feb 2017