KEY INVESTMENT HIGHLIGHTS

• 1QFY20 results disappoints

• Earnings dragged by weak utilities division and losses at cement unit

• Higher finance cost post-Malayan Cement acquisition, but losses narrowing on cost-cutting and rationalization

• Earnings revised down to reflect weaker-than-expected performance at utilities and cement units

• Maintain NEUTRAL at a lower TP of RM0.78

1QFY20 disappoints. YTL reported a net profit of just RM15m for its 1QFY20. This is well behind expectations accounting for just 3.5% of both our and consensus estimates. YTL’s earnings were dragged mainly by weak performance at the utilities division and losses at the cement division.

Weak contribution from utilities unit. Power Seraya’s losses deepened in 1Q20 to RM69m (4Q19: RM22m loss), despite a 15%yoy increase in revenue. The wider losses were due to a significant reduction in vesting contract levels and losses on sale of fuel oil though these were partly offset by lower depreciation.

Absence of Bestarinet. The mobile broadband division at YTL Power saw a sharp reduction in revenue (-50%yoy) given the absence of the Bestarinet contract contribution, which expired end-4QFY19. The impact on earnings was larger than earlier anticipated. The mobile broadband unit fell into a loss of RM70m in 1Q20 vs. quarterly losses of RM5m and RM23m in FY18 and FY19. We expect YES’ losses to remain around this level in the absence of Bestarinet contribution. To recap, YTLP’s Bestarinet contract was not renewed after the expiry in 4Q19. The Ministry is reported to be looking to re-tender the contract early next year and YTLP will not be excluded from the bidding.

Cement division. Post-acquisition of Lafarge (renamed to Malayan Cement), YTL’s cement division turned in a loss of RM10m in 1QFY20. EBITDA was positive, while underlying losses narrowed due to cost cutting exercises taken at Malayan Cement (i.e. lower fuel cost, savings in maintenance cost, manpower rationalization) but earnings at group level were dragged by higher finance cost.

Earnings revision. Given the weaker than expected set of results, we slash our FY20F/21F by 57%/55% to reflect: (1) Downward earnings revision at the utilities division (See YTL Power Results note) (2) Losses at the cement division for FY20F/21F.

Source: MIDF Research - 27 Nov 2019