Analysts' Recommendation

KAF: YTL Power becoming global player in power and utilities sector

KAF Investment Research, 1 June 2004

By Lucy Ng

YTL Power International Bhd (RM3.56)
Buys 35% effective stake in an Indonesian power producer

Purchase of a 35% equity stake In Indonesia's second largest IPP. YTL Power yesterday signed an agreement to buy an effective 35% equity stake in a 1,220MW coal-fired plant in Java, Indonesia. The purchase cost a total US$139.4 mln (RM529.7 mln). Since the Indonesian power group has borrowings of US$1,278.4 mln (RM4,857.9 mln), the effective price (enterprise value) of YTL's 35% stake is actually RM2,230 mln. This values the IPP for a total enterprise value of RM6,371.4 mln. The operator of the IPP is PT Powergen Jawa Timur and its holding company is PT Jawa Power. YTL Power is buying 100% of the operating company and 35% of the holding company.

Purchase price at a premium relative to earnings power and book value. The net book value of Jawa Power's fixed assets as at 31/12/02 was USS1,530.9 mln (RM5,817.4 mln). YTL's 35% stake of that would be RM2,036.1 mln which, matched against the apparent cost of RM529.7 mln, appears cheap. However, if we match that against the enterprise value of RM2,230 mln paid (RM529.7 mln + 0.35 * RM4,857.9 mln), the price paid is at a premium. In terms of earnings power, the IPP made a PAT of RM399.2 mln in FY02. The cost of RM2,230 mln pegs the purchase PE at 16x, also steep by Malaysian standards.

Impact on earnings. The acquisition should be completed in 2H 2004; therefore, impact on the bottom line will be felt in FY Jun05. YTL Power did not specify which month in "2H 2004" the acquisition would be completed but said the Acquisition would contribute, before financing costs, a PAT of about RM105 mln "commencing the financial year ending 30 June 2005".

Assuming the deal was completed end-2004, and that the contribution referred to was for 6 months, total profit of the IPP would come to RM600 mln (RM105 mln/0.5/0.35) a year. Assuming interest charges at 8% p.a. and a tax shield of 32%, the total net profit of the IPP would come to RM335.75 mln a year, after deducting for RM264.2 mln in after-tax interest expense. YTL's 35% share of that would come to RM117.5 mln. Adjusting for interest income forgone of RM11.4 mln a year due to the acquisition, net impact on PAT and EPS is an increase of RM106 mln or 4.62 sen a year.

Purchase should not reduce YTL's high dividend payments. We believe the acquisition of the Indonesian IPP will not have an impact on the dividend payout of VTL Power. Last year, gross DPS was 20 sen giving a yield of 5.6%. Maintaining this level of dividend payment would still make the company one of the most attractive on Bursa Malaysia in terms of yield. YTL is able to maintain its payments because it is cash rich and its businesses are highly cash generative. At last count (end-Mac04), YTL Power had more than RM4 bln in cash and deposits.

OUT-PERFORM. YTL Power is truly on its way to becoming a global player in the power and utilities sector. This investment follows two other major acquisitions in recent years:

1) in Dec 2000 of a 33.5% stake in ElectraNet SA, the owner and operator of the South Australian electricity transmission network; and

2) in May 2002 of a 100% stake in Wessex Water Limited, a water and sewerage operator in the United Kingdom.

YTL Power intends to use the Indonesian investment as a springboard to invest in other utility companies in ASEAN. At RM3.56, YTL Power is trading at a reasonable 12.9x FY Jun04 earnings and 12.5x FY Jun05 earnings without the acquisition. Adjusted for the acquisition, assuming completion by end-Dec 2004, PE would 11.7x in FY Jun05 and 10.1x in FY06 respectively. Maintain OUT-PERFORM.