This article first appeared in The Edge Financial Daily on November 27, 2018
YTL Corp Bhd
(Nov 26, RM1.15)
Maintain sell at a lower target price (TP) of 85 sen: YTL Corp Bhd’s first quarter ended Sept 30, 2018 (1QFY19) profit after tax and minority interests of RM126 million (-12% year-on-year [y-o-y]) is slightly below our and consensus expectations as it constituted 22% of our and consensus full-year forecasts. We believe the weaker-than-expected contribution from its utilities segment is the reason behind the earnings miss.
We have also cut our financial years 2019 to 2021 estimated (FY19-FY21E) earnings by 9.2% to 10.2% to incorporate our latest forecasts for the utilities segment. Unlike its other cement peers in Malaysia, YTL Corp’s cement business is still profitable despite the contraction in earnings before interest and tax (Ebit) margin to 8.3% from 8.8% a year ago. Due to the decline in margin, profit before tax for the segment is down 2% y-o-y to RM43 million in 1QFY19.
Although the results are within our expectations, YTL Corp’s 1QFY19 performance is encouraging. However, the outlook for the sector remains challenging, due to its competitors restructuring their cost structures to regain back their market share. Ebit for the construction segment contracted 98% quarter-on-quarter to RM600,000 from RM33.2 million in 4QFY18.
Nevertheless, we believe the profitability would likely increase in the coming quarters in line with the progress of the Gemas-Johor Baru (JB) double-track project, currently ongoing and expected to be completed by 2021 or 2022. There could be upside risks to the construction segment’s earnings. This is if they are able to achieve financial close for the Tanjung Jati “A” power plant project in Indonesia, owned by YTL Power International Bhd.
We have lowered our realised net asset value-based TP to 85 sen as we revised the fair value of its utilities segment. We also cut our earnings per share forecast for FY19E-FY20E by 9.2% to 10.2%, factoring in a more challenging operating environment.
Due to the weak prospects, we are maintaining our “sell” call at a lower TP of 85 sen, compared with 90 sen previously. There are several upside risks to our call, including construction contracts win, and an improving outlook for the utilities and cement operations. — Affin Hwang Capital, Nov 26