This article first appeared in The Edge Financial Daily on July 5, 2019

YTL Power International Bhd
(July 4, 82.5 sen)
Maintain sell with an unchanged target price of 77 sen: YTL Power International Bhd’s (YTLP) 60%-owned subsidiary YTL Communications Sdn Bhd (YTLC) released a media statement presenting its views on the appointment of three new interim Internet service providers (ISPs) at 10,211 schools nationwide. The three ISPs — comprising Telekom Malaysia Bhd (TM), Celcom Axiata Bhd and Maxis Bhd — will replace YTLC for six months in the second half of 2019. Thereafter, following necessary assessments and adjustments, the ministry of education (MoE) will select an ISP from 2020 onwards. Subsequently, following the expiry of Phase 2 of YTLC’s 1BestariNet (1BSN) contract on June 30, 2019, the MoE will adopt the learning platform Google Classroom to replace Frog Virtual Learning Experience (VLE).

We are disappointed that YTLC’s 1BSN contract expired prematurely before its full 15-year tenure. We believe that this project was the main earnings anchor for YTLP’s loss-making mobile broadband (MBB) segment. Furthermore, based on the Public Accounts Committee’s (PAC) findings, 1BestariNet Receiver Integrated System (1BRIS) towers operates on minimal operating expenditure (opex) due to favourable site rental rates. Additionally, free electricity at 1BRIS sites are a sweetener. Therefore, in addition to loss of 1BSN income, we are concerned that YES opex will surge following the expiry of this contract.

According to YTLC management, under the contract with the MoE, YTLC is allowed to continue using the existing school sites for its base stations. This is in line with the National Broadband Initiative. As such, we believe that the MoE and YTLC will need to enter into negotiations for new site rental rates. Based on YTLC management’s guidance, approximately half of YTLC’s network of 5,000 towers (population coverage: 85%) are located at school sites. Therefore, based on our estimates, YTLC would likely need to fork out additional incremental opex of RM69 million per annum for its former 1BRIS towers. This includes electricity payments and assuming market rates for site rental.

In our view, the loss of 1BSN contribution will likely create a gaping earnings hole for YTLC’s MBB segment. The latter has been reporting losses before tax (LBT) since 2011 (financial year 2018 [FY18]: RM91 million LBT, nine months of FY19 [9MFY19]: RM28 million LBT) on the back of low take-up rates for YES WiMax/4G (estimated subscriber base: 800,000). We estimate that 1BSN contributes annual revenue of RM500 million to YTLC’s MBB segment in FY20-21.

This is lower than the amount paid by the MoE in January-October 2018. According to Education Minister Dr Maszlee Malik, MoE paid RM530.3 million for 1BSN services during the said period. Therefore, based on our estimates, the removal of 1BSN contribution could erode YTLP’s profits by RM24 million per annum. However, if we add in incremental opex assumptions (excluding spectrum fees), the net impact is earnings erosion of RM66 million per annum in FY20-21. This translates into 10-11% of our FY20-21 forecasts. Nevertheless, our estimates are based on assumptions that 1BSN is profitable.

We do not completely rule out the possibility of an open retender for provision of Internet services at schools (excluding Frog VLE). In this case, YTLC management has indicated its interest to submit a fresh bid. Therefore, we maintain our earnings forecast at this juncture. This is pending clarity from YTLC management on new site rental rates, spectrum plans and others. — TA Securities, July 4