INVESTMENT HIGHLIGHT

• 3QFY18 missed estimates

• Construction and cement hit by lower margins

• Possible review of construction projects may impact prospects

• Maintain NEUTRAL at a lower SOP-derived TP of RM1.05 from RM1.30

3QFY18 missed estimates. YTL reported core net profit of RM105m for its 3QFY18, bringing 9MFY18 core earnings to RM346m. This is well behind estimates accounting for 45% and 50% of our and consensus’ FY18F.

Construction margins shrank. While there was better site progress and revenue more than doubled in 3QFY18, earnings were impacted by lower margins and high operating cost.

Orderbook expansion could be delayed or worst, cancelled. To recap, YTL’s construction order book was expected to expand significantly by end CY18F. From circa RM400m (comprising mainly internal property development projects e.g. YTL’s new Pavilion HQ), orderbook was expected expand to some RM12b by year end. Key drivers for this were: (1) The RM9.4b Gemas-JB double tracking project over the next 4 years (2) PDP role for the HSR project (3) Construction of 80%-owned Tanjung Jati coal power plant in Indonesia over the next 3 years – USD1b (RM3.8b) of the project’s USD2.7b project value comprise of construction. The Gemas-JB double tracking project, which was awarded to a consortium of Chinese companies comprising CRCC, CCCC and CECC in 2016 as well as the PDP for the HSR project are likely to come under the new Government’s review.

Cement division hit by lower margins. YTL’s cement division also saw similar trends. Revenues were higher given better sales volumes but margins were hit by higher production cost e.g. higher coal cost, and competitive pricing in the market.

Utilities unit provided stability. YTL utilities (accounts for 60% of group pretax) did well in 3QFY18 registering earnings growth of 19%yoy driven by Wessex Water’s rate hike and the opening up of the retail market, while the Paka plant also commence its short-term PPA since 2QFY18.

Earnings revision. We revise lower our FY18F/19F by 39%/39% to factor in lower margins for the cement division and the construction division as well as losses for the management services division. Accordingly, dividend yields are now lower at 2.8%.

Recommendation. Maintain NEUTRAL at a lower SOP-derived TP of RM1.05 (from RM1.30) to reflect: (1) Our TP was lowered for YTL Power to RM1.20 from RM1.48 (2) The earnings revisions in this report for YTL (3) The latest (decline) in price of YTL’s listed units.

Source: MIDF Research - 25 May 2018