Review

• YTL Power International Bhd’s (YTLP) 1HFY17 core profit of RM305mn (+12% YoY) was below our expectations and consensus, accounting for 41%/42% of full-year forecasts respectively. The shortfall was mainly due to higher-than-expected taxes.

• 1HFY17 core pretax profit of RM421mn (-4% YoY) was within our expectations. Recall that in 2QFY16, YTL Power recognized chunky oneoffs at its Malaysian power operations, including:- 1) write-back of impairment for receivables (RM153mn), and 2) arbitration award of RM38mn.

• Overall, it was an encouraging and improved set of 1HFY17 results. This was mainly due to:- 1) losses at the mobile broadband (MBB) segment halved to RM81mn (1HFY17: RM160mn loss), and 2) jump in pretax profits (+17% YTD) from Power Seraya (PS). We believe MBB’s improvement was mainly driven by 1Bestarinet and traction for its new YES 4G services (launch: 2HCY16). Whereas PS was aided by lower opex and interest expense.

• This more than offset the following dampeners:- 1) weaker GBP vs ringgit which resulted in lower contribution from Wessex Water (-5% YTD), 2) expiry of Paka’s PPA in 2QFY16, and 3) lower associate contribution from Jawa Power.

Impact

• In-line with 1HFY17 results, we incorporate higher taxes, increased losses at Paka, and reduce contribution from Jawa Power. In addition, we also account for lower net debt at PS. As a result, our FY17-19 forecasts are reduced by 6%-10%. Correspondingly, our SOP target price is raised to RM1.90 (previous: RM1.84).

Valuation

• Maintain Buy on YTL Power (TP: RM1.90), which is an attractive value play with stable cash flows, attractive yield, and earnings catalysts in the pipeline. The stock is currently trading at 1SD below historical forward P/B. This signifies a steep discount on its quality assets, with reference to its crown jewel Wessex Water.

• Meanwhile, earnings will receive a boost upon the startup of Tg Jati coal plant in Indonesia in 2020. In addition, the impending financial closure (target: 1QCY17) for Attarat shale plant in Jordan will also uplift valuations and earnings.

Source: TA Research - 24 Feb 2017