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This article first appeared in The Edge Financial Daily on June 4, 2019

YTL Corp Bhd
(June 3, RM1.14)
Maintain neutral with a lower target price (TP) of RM1.03:
YTL Corp Bhd’s nine months for financial year 2019 (9MFY19) earnings disappointed. The group reported a core net profit of RM87 million, which brought 9MFY19 core earnings to RM300 million. This accounted for just 59% and 46% of our and consensus forecasted financial year 2019 (FY19F) respectively. Key dragged downs were weaker-than-expected performance from the utilities division, (which accounts for 51% of group pre-tax) and cement division.

Power Seraya remained in the red in the third quarter of financial year 2019 (2QFY19) and pre-tax losses widened to RM87 million (RM47 million core pre-tax loss in 2QFY19). This was due to lower vesting contract level, lower retail margin and higher operating and finance cost. The wholesale market continues to be impacted by overcapacity.

YTL Power is in a good position to acquire to consolidate but an industry recovery may take a few years given the contracted take-or-pay liquefied natural gas pricing. The drag at Power Seraya more than offsets the improvement in earnings from Malaysian power division. The weak results underpin our recent downgrade.

Construction revenue reported strong growth year-on-year (y-o-y) given progress of the Gemas-Johor Baru (JB) double tracking. In line with the improvement in revenue, earnings also grew substantially (to RM17 million pre-tax profit from RM1 million in 3QFY18). Gemas-JB is a substantial order book catalyst — estimated contract value at RM8 billion (YTL’s portion).

Another big catalyst will be the construction of YTL Power’s Tg Jati power plant in Indonesia (estimated construction value of RM4 billion). We are hopeful that the conclusion of the Indonesian elections should bring about some progress for this project.

Cement division revenue was down by 4% y-o-y but earnings were up 76% y-o-y. Although lower sales volume impacted top line, margins improved significantly given higher selling price and lower operating expenditure.

Recent 51% acquisition of Lafarge will reflect small loss contribution in 4QFY19 (Lafarge 1QFY19 — financial year ending December net loss narrowed to RM32 million from RM66 million in 1Q of 2018). The acquisition should improve pricing power in the immediate term as YTL now controls 60% of Malaysia cement. Our building materials sector analyst expects Lafarge to break even in FY20F with a RM25 million profit.

Following our downward revision for YTL Power and given the consolidation of Lafarge’s losses from 4QFY19, we revise down our FY19F/20F for YTL by 16%/7%

Maintain “neutral” at a lower TP of RM1.03 following the earnings revisions. Key catalysts for a review of our call: i) progress in Tg Jati power plant project; ii) Improvement in Power Seraya earnings. — MIDF Research, June 3

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