KEY INVESTMENT HIGHLIGHTS

• FY20 core earnings disappointed.

• Dragged by weak performance at the utilities, property and cement divisions.

• Wessex Water impacted by impairments and deferred tax remeasurement, while cement division was negatively impacted by lockdown measures.

• Earnings unchanged as gradual recovery expected from reopening of economy; maintain NEUTRAL albeit at lower TP of RM0.72

Slipped into the red. YTL reported a 4Q20 core net loss of RM21m, which brought FY20F core earnings to RM41. This was below expectations, accounting for 51% of our FY20F and 16% of consensus. The deviation came mainly from weaker than expected performance at the property and cement divisions. Additionally, group effective tax rate remained inflated at 99% (or 61% if normalised for deferred tax remeasurement).

Utilities Division Review:

Weak showing from utilities division. The utilities division saw pretax earnings contracted 78%yoy to RM26m in 4Q20. The drag came mainly from Wessex Water, which registered pretax contraction of 58%yoy to RM72m. Secondly, the telco unit slipped into a loss of RM41m against a RM10m pretax profit in 4Q19 given absence of Bestarinet contribution which expired end-FY19. Thirdly, the group recognized a one-off deferred tax expense of RM162m due to remeasurement of deferred tax balances in 4Q20 which impacted the utilities division bottomline.

Multi utilities buffered by higher lease margins. Seraya’s 4Q20 revenue shrank 28%yoy given a decline in fuel oil price and lower electricity sales (-30%yoy). However, pretax losses narrowed by 24%yoy to RM17m given higher fuel oil tank leasing rates as well as higher retail and ancillary margins. According to EMA of Singapore, supply capacity is expected to contract by 7%/4% in CY20/21 while reserve margins are expected to reduce to 21% by 2023 from 33% in 2020. Coupled with consolidation of players (following YTLP’s purchase of the Tuaspring plant previously owned by Hyflux), underlying sector dynamics should improve. However, the macro weakness following the pandemic outbreak could drag near-term performance.

Wessex water impairment. Wessex’s performance in 4Q20 was negatively impacted by higher impairments of receivables of RM63m (GBP12m) following a review of the potential impact of Covid-19 pandemic on customers. Additionally, bottomline was impacted by a RM162m remeasurement of deferred tax balances arising from an increase in UK corporation tax rate from 17% to 19% after repeal of the previous legislation that reduced the rate to 17%.

Source: MIDF Research - 1 Sept 2020