INVESTMENT HIGHLIGHTS

• FY17 earnings met expectations

• Dividends halved on lower payout, Tg. Jati in final stages of financial close

• Paka commencement from Sep17 to drive FY18F earnings improvement

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

Results within expectations. YTL Power (YTLP) reported 4QFY17 earnings of RM199.5m, which brought FMFY17 earnings to RM673m. The result was within our estimate and consensus at 100% and 96% of FY17F respectively. 4QFY17 earnings were up 24%qoq due to lower losses for Paka plant and mainly, due to lower effective tax rates in the quarter. Dividends were halved to 5sen/share and represents a lower payout ratio of 57% (vs. FY16: 73%)

Multi-utilities division. Pretax earnings declined 34%qoq; earnings is still depressed due to generation oversupply. 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. Hyflux’s Tuaspring plant is loss making and the group is reported to be divesting a stake in the plant.

Other divisions. 4QFY17 pretax loss of RM14m for the Paka plant comprise of mainly depreciation and overhead costs. To-date, Paka recorded pretax losses of 104m. We had in the previous note, raised our FY18F earnings by 9% to factor in contribution from Paka from Sep17. Paka is expected to generate an estimated RM90m-RM100m EBITDA/annum through its 3 years 10 months PPA extension period. Water division pretax earnings did not change much relative to the last quarter, but group effective tax rates were lower on recognition of deferred tax credit arising from reduction in UK corporation tax rate of 18% to 17% from Apr 2020.

Dividend cut. Though earnings were in-line, we reduced our payout assumption to a more conservative ~50%, closer to actual FY17 payout and in anticipation of rising capex for Tg. Jati. 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 RM1.56.

Source: MIDF Research - 30 Aug 2017