Review

• YTL Power International Berhad’s (YTLP) 1QFY20 core net profit of RM73mn (-43% YoY) was below our and consensus’ estimates - accounting for 14% of full-year forecasts respectively. The disappointment was largely stemmed from: (1) lower-than-expected vesting volumes at Power Seraya, and (2) higher-than-expected losses arising from cessation of 1Bestarinet project.

• YoY profit plunge was mainly attributed to: (1) Power Seraya: significant reduction in vesting contract level and loss on sales of fuel oil, and (2) Telecommunications: loss of contribution from 1Bestarinet. We estimate the loss of revenue from this project amounted to RM101mn in 1QFY20. Correspondingly, Seraya and the telecommunications segment both reported steep pre-tax losses of RM69mn each in 1QFY20.
   
• QoQ, profit more than halved due to Seraya and the Telecommunications segment as detailed above. Additionally, bottomline was also dragged by one-off depreciation at Seraya due to change in asset useful lives and revaluation gains on investment properties. Nevertheless, profit decline was partially cushioned by improved contribution by Wessex Water, which reported 16% QoQ expansion in PBT.

Impact

• Changes to our forecast assumptions include: (1) incorporated actual figures from the FY19 Annual Report into our forecasts and Sum-of-Parts (SoP) valuation, (2) reduced vesting volumes for Power Seraya by 5%, and (3) accounted for higher fixed costs at the Telecommunications segment. As a result, our FY20-22 forecasts are slashed by 28%-35%.

Outlook

• UK water and sewerage regulator, Ofwat, has pushed back its announcement of final determinations for the 2019 price review until 16 Dec) because of the general election. To recap, Ofwat’s final assessment of water companies’ plans for the 2020-25 period was originally due to be published on 11 Dec.

• According to Moody’s rating agency, Ofwat plans to claw back ‘high-gearing outperformance’ - which would hurt water companies with debt/ to regulatory capital value (RCV) of more than 0.6x. Additionally, Ofwat plans to further reduce lowered allowed returns. Moody’s also warned of “increasing risk of future political interference” in the design of the regulatory framework.

• Wessex Water may be vulnerable, given estimated current debt/RCV of 0.7x. The possibility of lower returns in 2020-25, coupled with requirement to de-leverage may result in Wessex having to reduce dividends to YTLP to comply with financial covenants.

• 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 new power projects will only kick-in 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).

Valuation

• We maintain Sell on YTLP given lack of near-term catalysts for earnings recovery, coupled with high likelihood of sustained losses for Seraya and the Telecommunications business. Our SOP target price (TP) is lowered to RM0.66 (previous: RM0.71) subsequent to the changes above.

Source: TA Research - 27 Nov 2019