INVESTMENT HIGHLIGHT

• YTL’s 1Q18 within estimates

• Utilities to stabilise as Paka PPA extension kicks in

• 15% share price contraction more than reflects fall in dividends; yields are now attractive at 4.2%

• Possible revival of construction/cement unit a strong nearterm catalyst

• Upgrade to BUY at revised TP of RM1.40/share

Results within expectations. YTL reported core earnings of RM189m. This is within estimates accounting for 22% of both our and consensus’ FY18F respectively. 1Q18 earnings contracted 11%yoy mainly due to higher tax rates and to a certain extent, higher finance cost. However, EBIT was up 8%yoy while pretax was up 6%yoy.

Utilities have stabilised and to gradually improve. YTL’s utilities division (accounts for 53% of group pretax) is still dragged by its Singapore multi-utilities division, but earnings is stabilising. Meanwhile, YTL Power’s Paka plant commenced its PPA extension in September (1QFY18 captured a 1 month revenue contribution). As a result, pretax losses narrowed to RM18m from RM26m a year ago. The Paka plant is estimated to generate RM90m-100m EBITDA/annum through its 3 years 10 months PPA extension period expiring June 2021. We expect earnings contribution to improve in the coming quarters. Wessex Water’s revenue increased 13%yoy due to the opening up of the retail market for non-household customers and an increase in price as allowed by the regulators (by around 3% based on our checks). Earnings was however lower by 8%yoy due to higher finance cost.

Cement and construction revival? The cement division (which accounts for 13% of group pretax) has been a drag given oversupply, low demand and a competitive pricing environment. YTL’s construction division has also been lacklustre in recent years and was hit by higher operating cost in 1Q18 amid a dearth of jobs. However, we think possible wins from an abundance of rail-related projects in the near-term may drive a meaningful revival in YTL’s construction/cement earnings. On top of this, YTL’s construction and cement units should also benefit from the construction of YTL Power’s USD2.7b Tanjung Jati coal plant in Indonesia, expected to be commissioned in 2021.

Recommendation. Though we have lowered our TP to RM1.40/share (from RM1.54) to reflect changes to our TP for YTL Power (revised down to RM1.20 from RM1.52 today) we raise YTL to BUY (from NEUTRAL). Share price has fallen some 15% in the past 3 months since YTL’s cut in dividend payout in 4Q17 and we now see value emerging. Even at a lower 60% payout ratio (vs. previous ~100% payout), dividend yields are now attractive at 4.2%. Possible wins from rail-related projects should act as a strong catalyst to revive YTL’s construction division. While cement and Power Seraya are expected to remain a drag, these have been the case for the past 12 months and would have likely been reflected in the share price.

Source: MIDF Research - 23 Nov 2017