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.

HDBSVR: YTL Power, Maintain Buy

YTL Power: Resilient earnings & attractive yield

-Story: We understand that negotiations on the power purchase agreement (PPA) have not resumed after the general election. And if they do, we believe it would be on new tariff rates, and returns on additional capex for upgrading the power plants upon expiry of the existing concession. In any case, impact on local IPPs and resultant impact on YTLP's earnings is expected to be minimal since they account for only 23% and 22% of group FY08F and FY09F EBIT. With full cost pass-through for its Malaysian and Indonesian power plants, the issue of higher fuel costs is virtually non-existent for these operations.

-Point: We believe YTLP will continue to seek new acquisitions given its gross cash of RM7.6b as at 1H08. It recently proposed a RM2.2b convertible bond issue to refinance exiting facilities and to help fund potential new acquisitions. We envisage less competition for regulated assets as the subprime crisis has raised required rates of returns significantly.

-Relevance: We favor YTLP for its defensive utility-type earnings and attractive 8.6% net yield based on sustainable net cash dividend yield of 4.6%, and potential 1-for-25 share distribution that provides 4% net yield. YTLP also enjoys stable earnings and agreed rate of returns for Wessex and Electranet operations in UK and Australia. Maintain Buy with SOP-derived target price of RM3.00.