KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings disappointed

• Earnings dragged by losses at Power Seraya

• Mobile broadband fell into losses on absence of Bestarinet contribution, uncertainties on impairment and renewal in near-term

• FY20F/21F earnings revised down

• Downgrade to NEUTRAL at lower TP of RM0.70/per share

1QFY20 earnings disappointed. YTLP reported a weak set of results with core earnings registering at RM79 for its 1QFY20. This is below expectations, accounting for 15% of both our and consensus estimates. Group earnings were down 45%yoy despite revenue rising by 6%yoy. Wessex Water remained steady but Power Seraya and the mobile broadband division drove the weak earnings.

Seraya fell into deeper losses. 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 unit 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.

Earnings revision. We conservatively slash our FY20F/21F by 37%/32% to factor in: (1) The wider than expected losses at YES from absence of Bestarinet; our checks suggest this should be the run-rate going forward in absence of Bestarinet (2) The gradual reduction in Seraya vesting contract levels from 18% this CY to 14% in CY20F.

Recommendation. We downgrade YTLP to NEUTRAL from BUY previously and trim our TP to RM0.70 (from RM0.88) following the earnings downgrades in this report. We do expect meaningful earnings recovery in FY21F once YTLP’s 45%-owned oil shale power plant comes on-stream in FY21F. However, near-term uncertainties regarding impairments for YTLP’s Bestarinet investments and its renewal, if at all, are likely to drag share price performance.

Source: MIDF Research - 27 Nov 2019