YTL Power: 1H FY09 results: Sterling weakness largely priced in; yield support remains

· 1H FY09 profit below expectations, down 18% Y/Y to M$395MM, represents 41% of our full year forecast (42% of consensus). This is below expectations even after adjusting for the one-off windfall tax of M$90MM for the power division in 1Q FY09. In 2Q FY09, profits dropped 12% Y/Y but rose 19% Q/Q due to absence of the windfall tax.

· Segmental performance: Profits from power generation were in line, or up 6% Y/Y in 2Q FY09. The shortfall in profit, however, was registered mainly by Wessex Water, where 2Q FY09 profit fell by 19% Y/Y due to lower translated earnings with the 24% depreciation in the Pound Sterling versus the Malaysian dollar. In Sterling terms, 2Q FY09 profit from Wessex Water was flat Y/Y. Associate profits (i.e. PT Jawa and Electra Net) also fell short of our expectations, falling by 25% Y/Y.

· We cut our earnings estimates sharply from Wessex, factoring in J.P. Morgan's exchange rate forecast of M$5.40:£1 for 2009-2010. We also incorporate the impact of the M$8.6B acquisition of Powerseraya to be completed by 3Q FY09. The net impact is still a cut in group profit by 10% for FY09E and 19% for FY10E. Full year income from Powerseraya is expected by FY10, where we forecast net income at 8% of group profit, rising to 14% by FY11E. With the revisions, our forecast for the group is now 8% below consensus for FY09-10.

· Maintain OW: Our new Dec-09 PT is M$2.00 (down from M$2.25) based on SOTP valuing the power business on DCF and Wessex on its regulatory capital value of 1x. Hence, the stock still offers decent returns if we include a net dividend yield of 5% for FY09E, rising to 6% for FY10-11E (excluding scrip dividends) as Powerseraya's contributions rise. The group has declared total net DPS of 6 sen for 1H FY09, or 60% of FY09E DPS. The ability to extract value, reduce costs, or improve efficiency for Powerseraya in the long term is a key re-rating catalyst, and the group is also backed by a proven M&A execution track record. A key risk is regulatory changes in the Malaysian power sector, but this segment will account for no more than 20% of profits going forward.