KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings within ours but missed consensus estimates

• 2QFY20 core earnings down 48%yoy but improved 7%qoq

• Power Seraya remains in the red though losses narrowed slightly versus 1QFY19

• Telcos division losses ballooned on absence of Bestarinet contribution, uncertainties on impairment and renewal in the near-term

• Maintain NEUTRAL at unchanged TP of RM0.70/per share

2QFY20 behind consensus estimates. YTLP reported 2QFY20 core net profit of RM84m, which brought 1HFY20 core earnings to RM163m. This was within our estimates but below consensus expectation, accounting for 51% and 45% of full year projections respectively. Group earnings were down 48%yoy in 2QFY20 dragged mainly by losses at the telco division following the expiry of the group’s Bestarinet contract. Additionally, Power Seraya continued to be a drag on group earnings.

Seraya remains in the red. Power Seraya remained in the red in 2QFY20, though the quarter’s pretax loss of RM48m was slightly lower sequentially (1QFY20 pretax loss: RM69m). On a year-on-year basis however, Power Seraya’s losses narrowed substantially as 2QFY19 was impacted by a one-off impairment of receivables, coupled with lower depreciation this quarter. Vesting contract levels were lower in 2QFY20; in line with the vesting contract rollback schedule, vesting contract levels were reduced to 20% up till mid-last year, while only LNG vesting contracts are made available up until mid-2023. Thereafter, all forms of vesting contracts will be fully phased out. Vesting contracts are priced at profitable levels (and higher compared to current depressed USEP or wholesale rates), which provide the gencos with better earnings visibility previously. The phasing out of vesting contracts increases the earnings risk for gencos as a larger portion of generation have to be sold at market price, (which is unprofitable currently given the capacity oversupply in the market). Beyond 2023 however, we would expect the majority of the take-or-pay LNG supply contracts signed by gencos previously to have expired, which will reduce the necessity to continue producing in the current oversupply situation.

Telco losses ballooned. YTLP’s telco division saw losses balloon to RM107m in 2QFY20 given the absence of the Bestarinet project and price reductions in an effort to increase YES’ subscriber base. To recap, YTLP’s Bestarinet contract which accounted for half of the telco divison’s revenue was not renewed after its expiry in 4QFY19. The Education Ministry was reported to be looking to re-tender the contract this year and YTLP will not be excluded from the bidding. We understand that YES’ network piggybacks some of Bestarinet’s base stations, which helped lower its costs previously; the absence of this might have an implication on YES’ future cost base.

Recommendation. Maintain NEUTRAL on YTLP at unchanged TP of RM0.70. We do expect meaningful earnings recovery in FY21F once YTLP’s 45%-owned Attarat oil shale power plant comes on-stream in FY21F. However, in the nearterm uncertainties regarding impairments for YTLP’s Bestarinet investments and its renewal, if at all, is likely to drag share price performance.

Source: MIDF Research - 21 Feb 2020