INVESTMENT HIGHLIGHTS

(from RM1.55)

• 1HFY19 earnings missed estimates

• Seraya performance deteriorated and is a key drag

• FY19F/20F revised down by 12%/13%

• We downgrade YTLP to NEUTRAL; TP lowered to RM0.93

Weak 1H19. YTL Power reported weak set of results for its first half. Core net profit registered at RM162m bringing 1H19 core net profit to RM305m, accounting for just 44% and 45% of our and consensus FY19F respectively.

Seraya continues to disappoint. The earnings improvement we were looking for did not materialise as Seraya’s earnings continued to deteriorate, even if we exclude an RM70m impairment charge it took in 2Q19. Pretax losses widened to RM47m (Vs. RM16m in 1Q19). While average USEP rates saw gradual improvement from Jul-Oct18 period, this was shortlived as rates deteriorated towards end CY18. Additionally, Seraya was dragged by lower vesting contract levels and lower retail and tank leasing margin.

Broadband losses sustained at lower levels. Mobile broadband losses stood at RM10m in 2Q19, close to 1Q19’s RM8m loss and much better than the RM20m-25m quarterly loss seen in 2H18. This was 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.

New attempt at Bestarinet? 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. The group recently partnered Facebook to launch Terragraph – essentially a new wireless technology developed by Facebook that can deliver fibre optic speeds. Terragraph is currently undergoing trial runs in Penang and we would not rule out possibilities of YTLP attempting to re-bid for the Bestarinet contract utilising this new technology. However, details on cost of rolling out Terragraph is not yet forthcoming at this juncture.

Continued delay in reaching Jati’s financial close. There has been continuous delay in Tg Jati’s financial close, despite securing revised PPA terms from PT PLN (Persero) in early-2018. 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. Our last check late last year suggests YTLP was in negotiations with two possible financiers but we have yet to see any development on this front.

Forecast revision. We revise down our FY19F/20F earnings by 12.1%/12.6% to factor in weaker performance at Seraya given the continued disappointing earnings and weakening market price. The Hyflux issue continues to prolong – we were earlier banking on some capacity being eliminated but this does not seem to be the case, at least for now. Hyflux accounts for 3% of generation capacity in Singapore.

Source: MIDF Research - 28 Feb 2019