KEY INVESTMENT HIGHLIGHTS

• 1Q21 core earnings within our and consensus expectations

• Earnings recovered sequentially from improved performance at Wessex Water and Power Seraya

• Singapore power still reeling from overcapacity and macro slowdown in near-term

• Timely COD of Attarat plant crucial to buffer diminishing earnings from expiry of Paka plant extension

• Maintain NEUTRAL at unchanged TP of RM0.70

FY20F within expectation. YTLP reported a core net profit of RM87m for its 1Q21. This is within both our and consensus expectations at 24% and 29% of full year estimates respectively.

Key takeaways. Group core earnings were up by 11%yoy and 36%qoq to RM87m in 1Q21. The sequential improvement was driven by improved performance of Power Seraya as well as absence of impairment of receivables and deferred tax balance remeasurement at Wessex Water recognized in 4Q20. This was partly offset by a pretax loss of RM2m for domestic power business (585MW Paka plant extension) given a one-off write down of inventories, estimated at ~RM16m.

Wessex Water. Revenue was higher by 1.7%qoq and 2%yoy to RM874m due to strengthening of the GBP. Pretax earnings were significantly higher sequentially (+83%qoq) mainly due to absence of exceptionally high impairment of receivables of RM63m incurred in 4Q20 (following a review of potential impact of the pandemic on customers). Additionally, bottomline last quarter was impacted by a RM162m remeasurement of deferred tax balances which arose from an increase in UK corporation tax rate from 17% to 19%. On a year-on-year basis, Wessex Water’s earnings were lower by 33% due to higher depreciation and a price reset for PR19 (2020-2025), which entailed lower allowable returns, partly offset by a higher regulated asset base of GBP3.35bGBP3.89b for the current regulatory period.

Multi utilities driven by higher margins and lease rates. Power Seraya reported a contraction in revenues (-17%yoy) due to lower fuel oil price. However, it managed to return to the black in 1Q21 at a pretax profit of RM36m (1Q20: pretax loss of RM69m), due to higher retail and ancillary margins, higher fuel oil tank leasing rates and lower finance cost in the period. While the underlying Singapore power market is still reeling from overcapacity, according to the EMA, 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 gradually improve in the mid-term.

Recommendation. Maintain NEUTRAL on YTLP at unchanged TP of RM0.70. The Attarat plant delay is a drag to earnings growth expectations while Seraya’s performance is likely to be impacted by the macro slowdown in the near-term as Singapore operates a merchant electricity market. Nonetheless, beyond the pandemic-related issues, underlying dynamics of the Singapore power sector is likely to improve given the expected contraction in capacity which will drive gradually improved demand-supply balance, coupled with consolidation driven by Seraya’s acquisition of the Tuaspring plant. Meanwhile, timely COD of the Attarat plant is crucial to offset the expected diminishing earnings from domestic power as the Paka plant extension expires mid-CY21.

Source: MIDF Research - 27 Nov 2020