KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings disappoints

• Dragged by utilities division mainly given oversupply in Singapore power and absence of Bestarinet contribution

• Cement division returned to the black on improving cement prices

• Malayan Cement registering positive EBITDA, targeting bottomline turnaround in next 12-24 months

• Maintain NEUTRAL but TP revised up to RM0.85 to reflect run-up in Malayan Cement share price

2QFY20 disappoints. YTL reported a net profit of RM18m for its 2QFY20, which brought 1HFY20 earnings to RM33m. This accounts for just 17% of our and 13% of consensus’ FY20F. Group 2QFY20 earnings fell 61%yoy dragged by weak performance at the utilities division mainly.

Weak contribution from utilities unit. 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 would 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.

Cement division back to the black. YTL’s cement division turned in a pretax profit of RM50m (from a loss of RM10m in 1QFY19) thanks to higher sales volume and selling price in the quarter. Cement prices is estimated to have risen to RM230/tonne in the period from around RM200/tonne in 1QFY19 and this is expected to improve further in 3QFY20. PostMalayan Cement acquisition mid-last year, YTL Cement now controls ~60% of the market, which has led to gradual improvement in cement prices. Malayan Cement remains positive at the EBITDA level, although still loss making at the bottomline. YTL is targeting to turn Malayan Cement around within the next 12-24 months, targeting to extract further cost savings from economies of scale, reduction of duplicated functions and corporate overheads.

Property Division. YTL’s property division saw increased revenue in 2QFY20 (+43%yoy) driven by sales of completed properties of the 3 Orchard By-The-Park and The Fennel projects. However, earnings declined substantially given recognition of losses on sale of completed units and qualifying certificate extension fee incurred for the 3 Orchard By-ThePark project.

Earnings revision. While earnings were technically short of expectations, we leave our forecasts unchanged for now as further improvement in market cement prices and gradual improvement in Malayan Cement’s contribution could drive stronger earnings for YTL in the comping quarters.

Recommendation. Maintain NEUTRAL on YTL, though we raise our TP to RM0.85/share (from RM0.78/share previously) to incorporate the latest listed entities’ share price levels (for Malayan Cement in particular which has seen share price rise meaningfully) into our SOP valuation for YTL. Earnings at the utilities division is expected to remain weak in the near-term, but prospects for the cement division should gradually improve on the back of a consolidated market. On top of this, the construction division could see an improving outlook on the back of a potential HSR (high speed rail) project revival, progress on the existing Gemas-Johor Bahru double tracking project and progress on the Tanjung Jati (Indonesia) power plant project which could see YTL grabbing around USD1b (RM4.2b) in EPC works.

Source: MIDF Research - 21 Feb 2020