KEY INVESTMENT HIGHLIGHTS

• 1QFY21 core earnings within consensus but below ours

• Dragged by weak performance at the hotel and property divisions

• Utilities improved sequentially given better performance at Wessex and Seraya

• Hotel and REIT divisions still dragged by pandemic impact

• Maintain NEUTRAL at unchanged TP of RM0.70

Weaker than expected 1Q21. YTL reported a core net profit of RM31m for its 1Q21. This is below our expectation but within consensus, at 18% and 26% of estimates respectively. The deviation came mainly from weaker than expected performance at the hotel and property divisions. Additionally, group effective tax rate remains elevated at 64%.

Utilities Division Review:

Weak showing from utilities division. The utilities division reported pretax earnings were up 8%yoy and 255%qoq to RM94m 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.

Cement division returns to the black. The cement division turned in a pretax profit of RM92m against a loss of RM60m/RM10m in 4Q20/1Q20; the former was negatively impacted by impairment of receivables. The improvement was also driven by reduction in cost of production and improved efficiency in sales and distribution operations. The expected pick-up in domestic infrastructure projects, as underpinned in Budget 2021, bodes well for cement demand in the near-tomidterm. Following the acquisition of Malayan Cement, YTL’s cement division now commands a 60%-70% share of the domestic cement market, positioning it well to ride on this potential upcycle in infra spending.

Property division. The property division reported an LBT of RM17m in 1Q21 (4Q20 LBT: RM385m, 1Q20 PBT: RM28m). The division was impacted by lower sales for the Fennel project (under Sentul Raya Sdn Bhd) and the 3-Orchard By-ThePark project (under YTL Westwood Properties Pte Ltd). Additionally, SGREIT was impacted by rental assistance provided to eligible tenant affected by the Covid19 pandemic, including allowance for rental arrears and rebates for its Australian properties. Meanwhile, the hotel division reported an LBT of RM34m in 1Q21 as it was significantly impacted by lower travel and tourism activities caused by the pandemic.

Recommendation. Maintain NEUTRAL on YTL. Our FY21F/22F earnings are revised lower by 28%/18% to reflect the weaker than expected earnings from the hotel and property divisions mainly. Our SOP-derived TP of RM0.70, of which the REIT units are largely pegged to market price of the respective listed vehicles, remain largely unchanged. 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 and a pickup in infrastructure projects. On top of this, the construction division could see an improving outlook on the back of the potential HSR (high speed rail) project revival 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 - 27 Nov 2020