INVESTMENT HIGHLIGHT

• 1H19 earnings disappointed

• Earnings dragged by weak utilities division, despite improvements at construction division

• Earnings revised down 15%/21% over FY19F/20F

• Downgrade YTL to NEUTRAL and lower our TP to RM1.15

Earnings in-line. YTL’s 1H19 earnings disappointed. The group reported core net profit of RM133m for 2Q19, which brought 1H19 core earnings to RM213m. This accounted for just 36% of our earlier FY19 forecast and 38% of consensus. While we do expect further earnings improvement as YTL’s construction projects progresses, the utilities division is likely to remain a drag in the near-term.

Construction picked up pace. Construction revenue reported strong growth both QoQ and YoY, presumably given progress of the Gemas-JB double tracking, which was not impacted by the PH Government’s review of infrastructure projects in the past 8 months. In line with the improvement in revenue, earnings also grew substantially (+54%yoy). Gemas-JB is a substantial order book catalyst – estimated contract value at RM8b (YTL’s portion). Another big catalyst was supposed to be the construction of YTL Power’s Tg Jati power plant in Indonesia (estimated construction value of RM4b) but unfortunately, the project has seen continuous delays in reaching financial close.

Cement slated for improved volumes. Cement division revenue was up marginally on sequential basis while earnings improved 6%qoq. Future improvement should be driven by sizeable internal projects i.e. Gemas-JB double tracking.

Utilities. YTLP’s earnings were dragged by Seraya, which continued to deteriorate even if we exclude the RM70m impairment charge it took in 2Q19. Seraya’s underlying pretax losses widened to RM47m (vs. RM16m in 1Q19). While average USEP rates saw gradual improvement from JulOct18 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. 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.

Earnings revision. We revise down our FY19F/20F by 15%/21% to reflect the downward revision to our forecasts for YTL Power (which was mainly to reflect lower Seraya earnings) as well as downward revision to YTL’s construction orderbook assumptions – we conservatively exclude Tg Jati construction for now, until there is more concrete development on the project.

Recommendation. We downgrade YTL to NEUTRAL from BUY. Following the downward revision to earnings, our TP is cut to RM1.15 (from RM1.55 previously). Key catalysts for a review of our call: (1) Progress in Tg Jati power plant project (2) Improvement in Seraya earnings.

Source: MIDF Research - 28 Feb 2019