Review

• YTL Power International Berhad’s (YTLP) FY19 core net profit of RM560mn (-13% YTD) was within our expectations and consensus’ - accounting for 102%/100% of full-year forecasts respectively.

• Weaker YTD results were driven by:- (1) Power Seraya: (i) weakness in vesting contract volumes and margins, (ii) lower margins for retail non-fuel and ancillary income, and (iii) higher finance costs; and (2) Wessex Water: (i) FY18 included a one-off recognition of pension credit, and (ii) higher interest costs.

• Correspondingly, Seraya slipped into FY19 core pretax losses of RM172mn (FY18: RM72mn profit). On a brighter note, the latter’s sequential LBT narrowed by ~4x to RM22mn in 4QFY19. Whereas for Wessex, PBT declined 25% YTD despite an increase in regulated prices. We believe this was driven by a weaker GBP versus MYR.

• YTD bottomline decline was exacerbated by lower contribution from associates. On the other hand, improved contribution from other segments, particularly Investment Holding, cushioned FY19 profits. Additionally, this was further aided by lower depreciation and taxes.

• In 4QFY19, Mobile Broadband registered its quarterly maiden pretax profit since inception – driven by higher sales and lower opex. However, moving forward, non-renewal of 1Bestarinet contract may derail this turnaround. Meanwhile, quarterly PBT contribution from Paka IPP was stable – albeit there was recognition of plant impairment (~RM4.3mn) in 4QFY19. To recap, the plant’s short term power purchase agreement (PPA) expires in Jun-21.

• PBT contribution from Investment Holding surged to RM200mn in FY19 (FY18: RM44mn LBT). We understand this was mainly driven by:- (1) oneoff maintenance contract for associate Jawa Power in 3QFY19, (2) recognition of hotel revenue from Marriott The Hague at Netherlands, and (3) lower opex, amongst others.

• The Group declared final DPS of 5 sen (FY18: 5 sen), which is in-line with expectations. This translates to higher payout ratio of 84% (FY18: 63%).

Impact

• We raise interest costs as we assume the Group will leverage up for Tg. Jati’s capex spend in FY20 following its expected financial close. As a result, our FY20-21 forecasts are reduced by 5%-8%. Additionally, we introduce FY22F earnings estimates.

Valuation

• Whilst valuations for YTLP are attractive, we prefer to stay on the sidelines due to lack of near-term catalysts, coupled with earnings downside risk from loss of 1Bestarinet contract. Furthermore, Power Seraya is unlikely to turn around in the near-to-medium term. This is due to structural market challenges, namely acute oversupply of electricity in Singapore (reserve margin: ~90%). Meanwhile, YTLP’s pipeline of power projects will only kickin from 2H20) onwards. They comprise:- 1)(80%-owned 660MW Tg. Jati coal-fired plant, and 2) Attarat Power Jordan (45% stake, 2x 235MW shale– fired).

• We increase the book value discount on 60%-owned YTL Communications to 80% (previous: 40%). This is on account of the premature termination of the 1Bestarinet contract before Phase 3 implementation. Therefore, we believe there is a possibility of asset impairments at YTL Comm. As a result of this, and coupled with the cut in our earnings forecast, our target price (TP) on YTLP is reduced to RM0.68 (previous: RM0.77). Maintain Sell.

Source: TA Research - 30 Aug 2019