INVESTMENT HIGHLIGHTS

• 1QFY19 earnings within expectations

• Seraya’s dip into losses temporary

• Jati and Jordan shale plant upcoming catalysts

• Maintain BUY at unchanged TP of RM1.55, 4.7% yields attractive

Results in-line. YTL Power (YTLP) reported core net profit of RM143m for its 1QFY19, which was within our expectation as well as consensus at 21% and 20% of FY19F estimates respectively. YTLP’s core earnings fell 9%yoy to RM143m but some of these are affected by temporary factors and we would expect some improvement as the year progresses.

Seraya losses temporary. Seraya dipped into losses in 1QFY9 (RM16m loss) for the first time since the downcycle in Singapore power sector, but this is unlikely to be a precursor to its earnings trends. Several temporary factors impacted Seraya: (1) Run up cost for CCP10 and Cogen 40 after unplanned outages (2) Loss on sale of gas to reduce take-or-pay quantity. Other than these temporary factors, Seraya was also dragged by lower retail non-fuel and tank leasing margins as well as lower vesting contract in the period.

Wholesale rates rising. Average USEP wholesale electricity rates saw a sharp rise in October (+98%yoy) (See Exhibit 1) underpinning the improving trends seen so far this year – rates have been rising 2% - 60% this CY. Hyflux’s plans to divest its stake in its Tuaspring plant (the last large capacity to come on-stream in Singapore) is still on-going. Possible consolidation in Singapore power generation should help to ease oversupply in the sector. Hyflux Tuaspring accounts for 3% of Singapore generation capacity.

Hit by stronger RM. Water sewerage division (Wessex Water) was impacted by a stronger RM against GBP in 1QFY19 resulting in revenue and earnings shrinking 1%yoy and 9%yoy from translation impact. Sequentially, earnings were down sharply from an inflated base in 4QFY18 which recognised one-off pension credits.

Broadband losses narrowed. Losses from the broadband division narrowed significantly to RM8m from the previous run-rate of RM20mRM30m/quarter. This is following YES’ migration to its TD-LTE network from a hybrid LTE-WImax network previously. While there is risk from loss of the Bestarinet contract, which is estimated to expire mid-CY19, YTL will not be excluded from the bidding. Given that Bestarinet is technically integrated into the group’s broadband business, we would not rule out possibilities of YTLP pursuing a partner to help it grow the business.

Final round of negotiations. The group’s 80%-owned 1320MW Tg. Jati project is in the final round of Sukuk negotiations to achieve financial close. Whilst the Indonesian Government earlier indicated that it intends to delay more than half of the country’s power projects (following sharp IDR depreciation), this had been reviewed and latest reports suggests that hardly any projects will be delayed after all. To recap, Tg Jati is a 1320MW coal power plant scheduled for commercial operation in CY21F with a 30-year PPA up till 2051. The project is estimated to cost USD2.7b (RM11b) including land relocation cost and capitalised interest.

Re-affirm BUY on YTLP being one of the few local proxies to lucrative overseas power plant projects. Our TP is kept at RM.1.55. Dividend yields are generous at 4.7% (even at just 50% payout ratio) while valuations are cheap at just 10.6x – deep discount to the market’s 16x-17x. Key potential catalysts: (1) Financial close of Tg. Jati power plant expected within 1HFY19, (2) Completion of 45% owned Jordan shale power plant mid-CY20F (3) Consolidation in Singapore power generation sector, (4) Gradual expiry of LNG supply contracts for Singapore power, (5) Accelerated breakeven of mobile broadband business from any potential partnership.

Source: MIDF Research - 26 Nov 2018