INVESTMENT HIGHLIGHT

• YTL’s FYFY17 earnings ahead of ours but within consensus

• Cement and utilities remain a drag

• Dividends cut ahead of anticipated capex for Tg. Jati

• Maintain NEUTRAL at unchanged TP of RM1.54/share, dividend yield cut to 3.6%

Results met ours but missed consensus. YTL reported net profit of RM212m for its 4QFY17, bringing FY17 core earnings to RM796m. This is ahead of our estimate (mainly due to lower than expected effective tax rates of 16%) but within consensus accounting for 118% and 95% of FY17F respectively. 4QFY17 earnings contracted 12%qoq despite lower effective tax rates in the quarter. Dividends almost halved to 5sen/share; payout ratio cut to 65% (FY16: 106%).

Utilities unit a drag, but stabilising. YTL’s utilities division (accounts for 53% of group pretax) is still dragged by its Singapore multi-utilities division, though earnings is stabilising. 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; vesting volumes account for at least 25% of power demand in Singapore. A recovery may be a few years away given fuel supply contracts already signed up till 2018/19 by players. Water division benefited from lower effective tax rates on recognition of deferred tax credit arising from reduction in UK corporation tax rate of 18% to 17% from Apr 2020.

Cement is a big drag. The cement division (which accounts for 13% of group pretax) is expected to remain a drag and registered a 35%qoq (- 83%yoy) earnings contraction – in line with earnings trends of listed cement players e.g. Lafarge. The industry is likely to remain challenging in the near-term, facing oversupply, low demand and a competitive pricing environment.

Revisions. FY18F earnings is raised by 12% to reflect lower effective tax rates of 16%, but we cut our FY18F payout assumption to 60% in anticipation of rising capex for Tg. Jati. Implied dividend yield is now lower at just 3.6%. Capex for the 1320MW coal plant is estimated at USD2.7b (RM11.5b). Commercial operation date expected in 2021 with a 30 year PPA till 2051. YTLP is understood to be in the final stages of financial close for the project.

Recommendation. Maintain NEUTRAL at unchanged SOP-derived TP of RM1.54/share. Near-term, the group faces headwinds in the cement sector and Singapore generation units.

Source: MIDF Research - 30 Aug 2017