INVESTMENT HIGHLIGHTS

• 9MFY17 earnings met ours but missed consensus

• Singapore multi-utilities dragged 3QFY17, Wessex Water still impacted by weak GBP

• FY18F earnings raised to factor in Paka PPA extension

• Maintain NEUTRAL at higher TP of RM1.56/share

Results met ours but missed consensus. YTL Power (YTLP) reported 3QFY17 earnings of RM161m, which brought 9MFY17 earnings to RM474m. The result was within our estimate but missed consensus at 70% and 65% of FY17F respectively. Core earnings were lower by 4%qoq dragged by the multi-utilities unit in Singapore mainly.

Multi-utilities division. Pretax earnings declined 35%qoq on the back of a 5%qoq decline in revenue, we suspect due to lower vesting volumes this time around. 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 oversupply situation. Only the three largest gencos get to contribute to vesting volumes, which accounts for at least 25% of demand in the country. Fundamentally, rates should be stabilising as the last major capacity addition was in 1Q16 i.e. Hyflux’s ~400MW Tuaspring plant, but a recovery maybe a few years away given fuel supply contracts already signed up till 2018/19 by players.

Other divisions. Water division earnings did not change much relative to the last quarter given minimal change in the GBP levels. The broadband division also maintained similar losses as last quarter. To achieve breakeven, YES has a target of 1m subs (which is not too far off from the current ~600K base) but target ARPU of RM60 compares to incumbents’ ARPU of just RM41 (Digi) – RM50 (Maxis). YES is however generating ARPU of RM60 and above from corporate clients i.e. YTL Hotel group, but in the long run, will have to rely on the mass consumer segment.

Earnings raised. Though the 9M17 results were in-line, we raise our FY18F earnings by 9% after factoring in contribution from the Paka plant from Sep17 onwards. The group finally signed the overdue Paka plant PPA extension with Tenaga (after signing a new land lease). Paka is expected to generate an estimated RM90m-RM100m EBITDA/annum through its 3 years 10 months PPA extension period.

Recommendation. Maintain NEUTRAL but raise our TP to RM1.56/share (from RM1.40/share) after rolling over our valuation to FY18F and factoring in Paka PPA extension. The incremental value from Paka PPA is minimal at ~3sen/share given the short-term extension.

Source: MIDF Research - 26 May 2017