YTL Power 'buy', Sime Darby 'reduce'


By UOB Kay Hian Malaysia Research

Buy (maintained)

Target price: RM1.65

Energy firm YTL Power’s lower earnings in the first half of financial year 2018 (H1’18) were within expectations, according to UOB Kay Hian Malaysia Research.

The research house said the stronger ringgit had led to a decline in Wessex Water’s contribution, which in turn caused YTL Power’s H1’18 core net profit to fall by 15% year-on-year (y-o-y) to RM314.1mil.

Wessex Water is a YTL Power-owned water and wastewater services company based in the United Kingdom.

“While H1FY18 results account for only 42% and 41% of house and street estimates, we deem the results to be within expectations as effective tax rates appears higher at this point.

“For full year, we expect tax rates to normalise at 20% as compared to 27% and 13% in H1’18 and FY17 respectively,” it said in a note.

On the group’s financial performance in the second quarter, UOB Kay Hian Malaysia Research said that YTL Power’s top line rose 7% y-o-y and 2% quarter-on-quarter on the back of a RM197mil contribution from the Paka power plant, which commenced operation on Sept 1, 2017 for a short-term extension of nearly four years.

Apart from that, the higher revenue was also attributed to a 15% y-o-y increase in Wessex Water revenue and a higher subscriber base for YES, YTL Power’s telecommunications venture.

This was partly offset by a 10% decline in YTL Power’s power generation business, Power Seraya’s contribution due to the tough operating environment in Singapore as a result of generation capacity oversupply in the city-state.

The research house has left its earnings forecasts for FY18-19 unchanged.

“A depreciating sterling pound against the ringgit could see Wessex Water’s contribution decline in terms of nominal ringgit value and percentage to YTL Power’s bottom line. Every 1% change in the exchange rate will swing YTL Power’s net profit by 1.5%.

“This will also affect potential dividend payout as the bulk of cash flow for dividends is derived solely from Wessex Water,” said UOB Kay Hian Malaysia Research.

The research firm has reiterated its “buy” call on YTL Power on the back of near-term dividend yield of 5% to 6% and earnings upside from the group’s APCO and Tanjung Jati power plant projects, which is expected to lift future earnings by 60% by 2022.


By CIMB Research

Reduce (maintained)

Target price: RM2.42

Post-meeting with the management, CIMB Research expects Sime Darby Bhd to ride on mining demand recovery moving forward.

The research firm said that the uptick in Australia’s mining activity and the robust demand from Belt and Road initiatives in China will be positive for the group.

“The industrial division posted an impressive 115% surge in core profit before interest and tax (PBIT) from RM106mil in the first half of financial year 2017 (H1’17) to RM228mil in H1’18, driven by higher mining activity in Australia and China.

“To recap, the total industrial division order book increased by 64% year-on-year (y-o-y) from RM1.4bil in Dec 2016 to RM2.2bil in Dec 2017. The group expects the recovery in mining activity in Australia to continue to pick up with the uptick in the mining cycle,” said CIMB Research in a note.

The research house pointed out that there will not be further impairment and inventory writedowns related to Sime Darby’s decision to exit the motor business in Vietnam.

The group’s core net profit in 1H18 rose 89% y-o-y after stripping out non-core items such as the RM184mil exit cost for the Vietnam motor business, RM215mil gain on property disposal, RM85mil asset writedown for deconsolidation of Yayasan Sime Darby and RM24mil net forex gain.

The motor division’s core PBIT rose 20% y-o-y to RM269mil in 1H18, driven by higher sales volume in North Asia and stronger profitability from Australia and New Zealand due to the cessation of the loss-making Peugeot/Citroen business.

Sime Darby is exploring potential sales of its logistics assets in China, which is currently in the early stages, according to CIMB Research.

“The group’s logistics assets comprise Weifang Port, three river ports in Jining and two water treatment plants located in the Binhai Economic-Technological Development area. We currently value the logistics division at FY17 invested capital of RM2.3bil,” it said.

CIMB Research maintained its “reduce” rating on the stock, with an unchanged target price of RM2.42.

“Potential de-rating catalysts include weaker-than-expected auto and heavy equipment sales and profit margins as well as disappointment over the group’s ability to create shareholder value following the demerger,” said the research house.