INVESTMENT HIGHLIGHTS

• 9M19 earnings missed estimates

• Seraya performance deteriorated further and is a key drag

• FY19F/20F revised down by 8%/8%

• Maintain NEUTRAL, TP lowered to RM0.88

9M19 results disappointed. YTL Power (YTLP) reported core net profit of RM112m for its 3Q19, bringing 9M19 core earnings to RM416m. This is short of both our and consensus estimates accounting for 69% and 59% of full year projections respectively. Performance of the multi-utilities division was weaker than expected having reported its 3rd quarterly loss.

Seraya still disappoints. Power Seraya remained in the red in 3Q19 and pretax losses widened to RM87m (RM47m core pretax loss in 2Q19). This was due to lower vesting contract level, lower retail margin and higher operating and finance cost. The wholesale market continues to be impacted by overcapacity. YTLP is in a good position to acquire to consolidate but an industry recovery may take a few years given contracted take-or-pay LNG pricing. The drag at Seraya more than offsets the improvement in earnings from Malaysian power division. The weak results underpin our recent downgrade.

Broadband losses sustained at lower levels. Mobile broadband losses stood at RM9.9m in 3Q19, close to 2Q19’s RM10m 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. YTLP recently partnered Facebook to launch pilot test of Terragraph – essentially a new wireless technology developed by Facebook that can deliver fibre optic speeds. We would not rule out possibilities of YTLP attempting to re-bid for the Bestarinet contract utilising this new technology. Details on cost are not yet forthcoming at this juncture.

Forecast revision. We revise down our FY19F/20F earnings by 8%/8% to factor in the weaker than expected 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.

Recommendation. Maintain NEUTRAL at a lower TP of RM0.88 following the downward earnings revisions. Potential catalysts that could drive a review of our call: (1) Financial close of Tg. Jati power plant (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 - 3 Jun 2019