INVESTMENT HIGHLIGHT

• 9M19 earnings disappointed

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

• Earnings revised down 16%/7% over FY19F/20F

• Maintain NEUTRAL at lower TP of RM1.03

9M19 disappointed. YTL’s 9M19 earnings disappointed. The group reported core net profit of RM87m , which brought 9M19 core earnings to RM300m. This accounted for just 59% and 46% of our and consensus’ FY19F respectively. Key drag were weaker than expected performance from the utilities division, (which accounts for 51% of group pretax) and cement division.

Seraya losses widens. 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.

Construction picked up pace. Construction revenue reported strong growth year-on-year given progress of the Gemas-JB double tracking. In line with the improvement in revenue, earnings also grew substantially (to RM17m pretax profit from RM1m in 3Q18). Gemas-JB is a substantial order book catalyst – estimated contract value at RM8b (YTL’s portion). Another big catalyst will be the construction of YTL Power’s Tg Jati power plant in Indonesia (estimated construction value of RM4b). We are hopeful that the conclusion of the Indonesian elections should bring about some progress for this project.

Cement slated for improved volumes. Cement division revenue was down by 4%yoy but earnings were up 76%yoy. Although lower sales volume impacted topline, margins improved significantly given higher selling price and lower opex. Recent 51% acquisition of Lafarge will reflect small loss contribution in 4Q19 (Lafarge 1Q19-FYE Dec net loss narrowed to RM32m from RM66m in 1Q18). The acquisition should improve pricing power in the immediate-term as YTL now controls 60% of Malaysia cement. Our building materials sector analyst expects Lafarge to break-even in FY20F with a RM25m profit.

Earnings revision. Following our downward revision for YTLP and given consolidation of Lafarge’s losses from 4Q19, we revise down our FY19F/20F for YTL by 16%/7%.

Recommendation. Maintain NEUTRAL at a lower TP of RM1.03 (from RM1.15) following the earnings revisions. Key catalysts for a review of our call: (1) Progress in Tg Jati power plant project (2) Improvement in Seraya earnings.

Source: MIDF Research - 3 Jun 2019