INVESTMENT HIGHLIGHTS

• 1Q18 earnings disappointed

• Earnings trimmed to reflect higher borrowing cost

• Paka commencement to drive FY18F earnings improvement

• Maintain NEUTRAL at lower TP of RM1.20/share

Slow start. YTL Power (YTLP) reported 1QFY18 core earnings of RM157m. The results disappointed accounting for 19% of our earlier FY18F and 21% of consensus. Key deviation was higher than expected finance cost. EBIT came in line with expectations accounting for 26% of our FY18F. Though we think earnings should improve from 2Q onwards given more meaningful contribution from Paka’s PPA renewal we have trimmed our FY18F earnings by 15% to factor in higher debt and finance cost. At the group level, earnings were up 7%yoy on the back of a 10% increase in revenue. Though EBIT margins were higher at 15%, net profit margin was hit by higher finance cost and higher tax rate in 1QFY18.

PPA extension commences. YTLP’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.

Multi-utilities division. Power Seraya’s pretax earnings declined 25%yoy; 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. 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.

Recommendation. YTLP is expected to continue in its debt build up phase in anticipation of further capex i.e. 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. Our dividend payout assumption has already been reduced to 50% in our previous report. Maintain NEUTRAL at a lower SOP-derived TP of RM1.20 in-line with changes to our borrowing/capex assumptions.

Source: MIDF Research - 23 Nov 2017