YTLPOWER Latest Result Review

First off, the EPS for last quarter was terrible registering only 0.15 per share compared to previous quarter of 3.81 per share. That's a hefty 96% drop. Mainly due to a one-off deferred tax charge of RM442.5 mil on their Wessex Water (WW) result. Announced dividend is also half of previous quarters, giving only 3.75% or 1.875 sens per share.

Reading through the report though paints a better picture of the operational profit of YTLP, as profit from their overseas subsidiaries have perform as expected. As I wrote in my previous posting regarding their 4th quarter results will equal or exceed their 1st quarter, it perform as expected. The only unexpected or rather not properly circulated info was the one-off deferred tax charge that almost completely wipe out the current quarter EPS.

The deferred tax charge was realised in WW operations due to the abolition of Industrial Building Allowance (IBA) in the UK. Although it is not a payment or cash outflow, the realisation is recognized to conform to the FRS 112 accounting standards. Thus this quarter tax is almost 98% of total operational profits, leaving only a measly RM9 mil as net profit after tax. If Seraya Power (SP) profits was not registered this quarter, YTLP would no doubt be in the red for the 1st time.

Thankfully market reaction has been neutral over the results. There was no sell-off after the announcement nor was there serious buying activity.

Profit from Operations

Looking past the tax issue, the more important part of results was the future earnings of YTLP. As I've said the earning power of SP was no doubt crucial to maintaining a small profit this quarter. Report states that SP for the 4 months of this year yielded RM197.4 mil profit before tax for the company. If you cut out 1/3 of it to account for tax, it is about RM130 mil of net profits for 4 months. For info, 1/3 is just my rough way of calculating tax, as most company taxes lie between 25-30% so it's a very conservative and rough guide.

WW operational profit was also higher compared to last quarter as it is normally stronger in YTLP 4th quarter result compared to all other quarters in the year. This coupled with a higher translation of GBP exchange compared to RM made operation revenues at least RM110 mil more or about 19% increased. For comparison, GBP appreciated about 12% against the RM since the last quarter result.

What segment which did not appear but expected by me was the oil trading profit/loss. Maybe it is included in the electricity generation operational profit.

One-off too many.

Perhaps it's unlucky for YTLP investors that for 2 times this year there has been a government fiscal interference with quarterly result. First one was the controversial Windfall Tax by the Malaysian Government on IPPs that YTLP had to pay roughly RM90 mil for. Luckily the government wised up and states it is a one-off charge because of the impact it would cause the bond market and subsequent investor relations in the country. That payment was realised in the 1st quarter of 2009.

Then this quarter, a one-off charge to realised a deferred tax after the abolition of the IBA in the UK caught investors including me by surprise. Seriously, the lack of info regarding this by the company and research houses is really disappointing. Or maybe they did cover the issue though I don't remember reading about it. Regardless, the charge is a one-off thing and should be the end of it. Although this does not represent actual outflow of cash, it does or will affect the future tax payments of WW in the future.


What the future looks like.

Well I believe next quarter onwards might see some pretty solid results if the GBP and also now taken into account, the SGD holds. Barring anymore one-off charges, net profits next quarter will probably double previous quarters which was not affected by one-off charges or 'normal' quarters.

EPS will greatly improved and hopefully so will dividend payments. Though I don't think anymore share dividends will be offered since share buybacks have been reduced significantly after putting the spare cash to better use ie. acquisitions.

Current price of RM2.12 is actually quite attractive if counting future EPS improvements. If there wasn't a one-off charge this quarter, the basic EPS might have climbed to 8.3 sens. And if the new EPS is annualised, current price only stands at PER of 6+. But as what future holds in still undetermined, I guess only when it is really proven the EPS can be maintained or equate to dividend paid would the stock actually start appreciating.

Power Seraya (PS) was expected to contribute about 40-50% more net profits to YTLP bottom-line if their previous years annual reports are any indication. A conservative 30% contribution would be more than enough to lift the stocks by the same percentage.

But beware the diluting effects of their warrants. Their WA warrants are due in Jan 2010 so future EPS needs to be calculated based on their WA warrants dilution in the market. FYE 2010 results will no doubt show just how diluting the WA will be come Jan 2010.