INVESTMENT HIGHLIGHT

• FY19 earnings disappointed

• Deviation from shortfall in construction earnings, despite improvements

• Utilities division resilient

• Maintain NEUTRAL at unchanged TP of RM1.03

FY19 missed estimates. YTL’s FY19 earnings disappointed. The group reported core net profit of just RM2.4m for its 4Q19, which brought FY19F earnings to RM302m. This is below both our and consensus expectations accounting for 71% and 70% of full year forecasts respectively.

Construction earnings shortfall. The deviation against our forecast came mainly from a shortfall in construction earnings. Although construction revenues improved significantly (more than tripled compared to FY18), earnings failed to match this growth (albeit still posting a 71%yoy growth). We think this is more of timing of recognition of different parcels of the Gemas-JB double tracking project.

Construction order book. Gemas-JB double tracking is a substantial order book catalyst for the construction division – 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 in this project.

Utilities division. Utilities division earnings were pretty much similar to last quarter. The year-on-year contraction is mainly due to last year’s one-off pension credit which inflated earnings. Power Seraya remained in the red in 4Q19 but pretax losses narrowed to RM22m (RM87m pretax loss in 3Q19) driven by higher volumes and revenue (+8%qoq). Domestic power saw a 27%yoy earnings contraction due to an impairment taken, estimated at ~RM4.4m. Excluding this, earnings would have been slightly stronger.

Cement division. Cement revenue increased 21%yoy in 4Q19 driven by consolidation of Lafarge (circa one-month consolidation). Earnings also saw an improvement but this was driven by associates.

Earnings revision. Following our downward earnings revision for YTLP our FY20F earnings for YTL is revised down by 2%. We also introduce our FY20F at RM480m, implying 9.6% growth against FY20F.

Recommendation. Maintain NEUTRAL at unchanged SOP-derived TP of RM1.03 – the earnings revision, which was mainly to factor in the lower earnings expectation from YTL Power does not impact our valuation – pegged to our TP for YTL Power which remains unchanged.

Source: MIDF Research - 30 Aug 2019