INVESTMENT HIGHLIGHTS

• 2QFY18 met our expectation but missed consensus

• Earnings looks to have stabilised, strong balance sheet for consolidation in Singapore power generation

• Risk reward turning positive at current price levels

• Upgrade to BUY from NEUTRAL at higher TP of RM1.48, 4%- 5% yields attractive

Results within expectations. YTL Power (YTLP) reported 2QFY18 core earnings of RM156m, which brought 1HFY18 core earnings to RM313m. This is in-line with our expectation accounting for 45% of our FY18F but fell behind street estimates at just 41% of consensus. 2HFY18 should be stronger given full half contribution of Paka PPA extension.

2QFY18 core earnings were flattish sequentially. Domestic power generation turned to the black but this was offset by wider losses at the mobile broadband division and higher finance cost at Wessex Water, despite higher revenues registered. Tax rate was marginally higher qoq.

Maiden profit from Paka. YTLP’s Paka plant commenced its 3-year 10- months short-term extension in Sep17. The 2QFY18 reflected its maiden full quarter contribution and maiden earnings of RM14m (vs. 1QFY18’s loss of RM18m). We estimate EBITDA of RM90m-RM100m/annum throughout Paka’s PPA extension expiring June 2021. The group is still holding on to its Pasir Gudang plant. Despite the absence of any PPA extension for the plant, management is of the view that there is value to a plant that is readily connected to the grid.

Seraya looks to have stabilised. Power Seraya earnings improved slightly (+12%qoq) and underlines our view that underlying rates should have reached a bottom given the absence of large new capacity in the market. Hyflux’s 400MW plant (which was the last major capacity addition in the market) is reported to be up for sale after only having been operational since 1Q16. YTLP has a decently strong balance sheet and does not rule out consolidation in the Singapore power generation sector from the current 7 players. More importantly, 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. Vesting contracts are expected to be phased out by mid-2019 but this also ties in with the gradual expiry of take-or-pay LNG supply contracts to industry players between 2018-2023, which should gradually improve underlying fundamentals.

Dividend yields have turned attractive. Following a cut in payout in FY17, we had earlier revised down our payout assumption to a more conservative ~50%. Notwithstanding rising capex for Tg. Jati - 1320MW coal plant estimated at USD2.7b (RM11.5b), which will be backed by project financing, dividend yields have turned attractive at current price levels. Commercial operation date for Tg. Jati is targeted for 2021 with a

Upgrade to BUY (TP: RM1.48). Risk reward has turned attractive at current price levels; dividend yields are now attractive at 4%/5% (FY18F/19F) even at just 50% payout ratio assumption, while earnings is likely to have stabilised. Furthermore, the market has yet to factor in the incremental value of 80%-owned Tg. Jati and YTLP’s 45% stake in a Jordanian shale oil power plant (under construction, due for operations mid-2020) which carry attractive IRRs of low and high teens respectively. Upgrade to BUY at higher SOP-derived TP of RM1.48 (from RM1.20) after rolling over valuations to FY19F. Key potential catalysts: (1) Financial close of Tg. Jati power plant expected within 2HFY18, (2) Consolidation in Singapore power generation sector, (3) Gradual expiry of LNG supply contracts for Singapore power, (4) Accelerated breakeven of mobile broadband business from any potential partnership.

Source: MIDF Research - 26 Feb 2018