YTL Power International Bhd’s (YTLP) core net profit of RM84 mil for its six months ended Dec 31, 2019 missed both consensus and RHB Research’s expectations.
Despite this, RHB Research has upgraded its recommendation for the company from neutral to buy, based on YTLP obtaining the business viability guarantee letter for its Tanjung Jati, Java, plant project.
On Feb 20, YTLP announced a lower net profit of RM70.26 mil for 2Q19 from RM71.77 mil a year ago mainly due to the widening loss of its telecommunications business.
For the six-month period, YTLP’s net profit fell 30.5% to RM137.62 mil from RM198.05 mil, while revenue grew marginally to RM5.76 bil from RM5.73 bil.
RHB Research said the weaker set of results for YTLP was due to losses at its telecoms unit. The company had not declared any dividends for the quarter.
YTLP’s 2QFY20 core profit improved 8% qoq due to stronger JV and associate contributions (+22%), led by commissioning income post completion of a power plant in Jordan and lower tax expenses (-13% qoq).
The losses at its telecoms unit were due to lower average selling prices which were part of the company’s strategy to gain more subscribers. This was cushioned by better earnings contributions from Wessex Water.
The research firm said there was clearer earnings visibility from Wessex Water.
“The Water Services Regulation Authority or Ofwat has reduced the returns on capital for the water assets in the UK for the next regulatory period (2020-2025),” said RHB.
However, this will be partially mitigated by YTLP‘s growing asset base. Despite anticipating lower returns (a 2-5% earnings decline in FY20-21), it believes that Wessex Water is still capable of anchoring the bulk of YTLP’s dividends.
For its 660MW coal-fired power plants in Java, YTLP recently obtained a business viability guarantee letter from the Indonesian Finance Ministry. It is confident of achieving financial close very soon.
YTLP raised RM2.5 bil in sukuk in April 2017, and the net gearing position is expected to increase from the current 1.7x level if the Tanjung Jati project takes off.
“We are not overly concerned about elevated net gearing, given that the bulk of the debt is backed with contracts, ring-fenced, and with non-recourse to the group,” said RHB.
Meanwhile, the 45%-owned 554MW oil shale-fired power generation plant in Jordan is at the testing and commissioning stage and is on track to commence operations in mid-2020.
RHB acknowledged that PowerSeraya and the telecoms business are likely to stay challenging in the near term, adding that the downside risks have been priced in.
The research house has cut its FY20-22 earnings by 11-14% on lower contributions from the telecoms segment but has upgraded its recommendation for YTLP with a higher SOP-derived TP of 95 sen with a dividend yield of 5.3%.
At 12.20pm today, YTLP shares were traded unchanged at 72 sen. Some 725,200 shares changed hands. – Feb 21, 2020
