Analysts' Recommendation

Avenue: YTL Power becoming a global energy provider

Avenue Scope, 2 July 2004

YTL POWER INTERNATIONAL BERHAD
MARKET PERFORM
Target Price: RM2.10 (16.0%)

Y/E
30 Jun

PBT (RM’m)

Net Profit (RM’m)

EPS (sen)

EPS Chg (%)

Consensus EPS (sen)

PER (x)

Dividend (sen)

Net Div Yield (%)

2002a

646.6

485.9

10.6

10.6

-

17.1

7.1

3.9

2003a

836.6

603.4

13.2

24.2

-

13.8

7.1

3.9

2004e

825.3

595.3

13.0

-1.3

13.2

13.9

7.1

3.9

2005f

927.0

668.6

14.6

12.3

13.6

12.4

7.1

3.9

Share cap: 4520.0m shares
Market cap: RM8,181.2m
52 week hi/lo price: RM1.87-RM1.49
ROE (%): 13.2%
Major shareholders: YTL Corp (55.3%)

Abs performance % (1,3,12 mths): 0.0%, + 8.4%, +20.7%
Rel performance % (1,3,12 mths): -1.7%, + 16.4%, +1.3%
NTA: RM0.99
P/NTA: 1.8x
Est. Free Float (%): 28.9

 

YTL Power is becoming a global energy provider. With the recent announcement of the group buying into Jawa Power, YTLP is fulfilling its dreams of being a global energy player. The purchase of Wessex Water back in 2003 had already transformed the group as a global utility player and by adding Jawa Power into the revenue stream, 70% of the group’s revenue and profits will come from overseas ventures. This helps to mitigate business cycles peaks and troughs of a particular market.

Expansionary mode. Recently YTL Power has announced that they are acquiring Powergen’s 35% stake in Paiton II power plant or also known as PT Jawa Power from PR Bumipertiwi Tatapradipta for US$139.4m or RM528.2m. Additionally the group is also acquiring 100% of PT Powergen Jawa Timur, which is the plant’s O&M operator for US$3.7m. On a PE basis this is a mere 5.0x on historical earnings of RM105m. The group plans on using part of its RM4.7bn cash hoard to fund for the acquisition.

Background

PT Jawa Power was established on March 29, 1995, as a limited liability company under Indonesia law for the sole purpose of constructing, owning and operating a 1,220MW coal-fired power station, which is located at the Paiton Complex and is connected to the Java-Bali grid. The power station has two 610MW coal-fired gensets and a 30-eyar PPA with the state-owned electricity supplier PT Perusahaan Listrik Negara (PLN) at a price of US$0/468KWh with close to US$14.3m in severance payments for the restructured PPA back in 2002.

Jawa Power is owned by Powergen (35%), Siemens Project Ventures GmbH (50%), a subsidiary of Siemens Financial Services GmbH, and PT Bumipertiwi Tatapradipta (15%).

Jawa Power is part of the Paiton Power Complex, which is Indonesia’s maiden IPP project with ultimately a coal-fired capacity of 4,000 MW. The site has been designed to accommodate eight power generation units. Units 1 and 2 are owned by PLN. Units 5 and 6 are owned by Jawa Power and Units 7 and 8 are owned by PT Paiton Energy Company. Units 3 and 4 are expected to be developed in the future by PT Paiton Energy

History of Indonesia’s Power Industry

The Indonesian power sector has a history similar to that of Malaysia where before the 1980’s, all segments – generation, transmission and distribution – were undertaken by the government entity PLN. Demand averaged between 14%-17% during the 1980s and 1990s. PLN was solely responsible for the commissioning of new plants and installing the country’s transmission and distributions system. Only after 1985 when regulation to encourage participation from the private sector to help fund the expansion of the power sector was in place. The first IPP was formed in 1990 under the build-operate-and-own scheme, Paiton I. After 1993 the World Bank made the power sector restructuring an explicit condition for the continued lending to the sector. After Paiton I, there was an additional 25 PPAs signed by the incumbent PLN.

Under the scheme by World Bank, Indonesia’s power sector would see the evolvement from a state-owned monopoly into a competitive but regulated, multi-buyer-multi-seller industry. While the financial crisis stalled this strategy, the lenders – IMF, World Bank, Asian Development Bank and others – insisted that Indonesia must continue on its reform package.

As part of this reform, a study was conducted on existing PPAs and revealed that most were exorbitant, citing corruption and nepotism within the system. Subsequently all the PPAs were or are still in the process of being renegotiated.

Currently supply within the main transmission grid, Java-Bali is sufficient to meet existing demand. However it is expected that demand would outpace supply possibly by 2006 or 2007. By 2010 PLN estimated that the power demand growth would average 10% a year.

Local IPP investments vs Indonesia IPP   

 

Local Power Plants

Indonesian Investments

Name

Paka & Pasir Gudang

Jawa Power

Gross capacity
                            Paka
                Pasir Gudang

1212MW
808MW
404MW

1220MW

Construction cost

RM3.4bn

US$1.7bn

Term

21 years

30 years

Extensions

2 5-year terms

-

Commissioning date
                            Paka
                Pasir Gudang

 
Dec 95
Nov 95

Jul 00

PPA type

Take or Pay

Take or Pay

Minimum off take

100%

100%

PPA rate

RM15.5sen

US$4.68 cents / RM17.7sen

Severance package

-

US$400.0m or 14.3m per annum

Plant type

Gas CC

Coal

Fuel agreements

Fuel pass through clause

Fixed at US$25/mt
for 30 years

Thermal efficiency

47.7%

39%

Stake

100%

35%

Price per MW

-

RM1.2m

Revenue (RM mil)

1,115.5

1,900.6

Source: YTL Power, web search, and Avenue Securities

Inherent risks

Payment Risk

Low ~ PPA is fully functional where payments are backed by the full faith of the Government of Indonesia via a letter of intent.

PPA Risk

Low ~ PPA was just revised in Dec 2002 to alleviate the political interference that was rampant in late ‘90s. Restructuring the PPA involves a costly litigation process. Jawa Power is receiving a restructuring payment of US$14.3m a year for 30 years. The Java-Bali grid system is facing a shortage of supply PPA is on a take or pay basis.

Fuel Risk

Low ~ Mitigated by long term supply agreement with three local mines at an average price of US$25.00/mt.

Currency Risk

Low ~ All other costs and revenue in US$. Risks shifted to PLN.

Interest Rate Risk

Low ~ Project finance basis on long term basis from US Exim, German Hermes, KfW and C&L.

Acquisition Risk

Low ~ Despite Keppel coming into the picture first, PT Bumipertiwi has 1st right to buy if another partner wants out. Siemens has also given its blessing to YTLP coming into the picture.

Country Risk

Medium to High  ~ As citizens remain annoyed of corruption, cronyism, and nepotism. Using project discount rate of 24% (13.8% country risk and 102% for project risk).

Operation Risk

Low ~ As O&M will be provided by YTL

Credit Risk

Low ~ As PPA is locked in, fuel price hedge, currency risk mitigated.

Value enhancing. In tune with YTL Power’s business strategy to acquire value enhancing regulated assets, we see this acquisition to enhance the group’s value by 20 sen using the new share cap and a project DCF methodology discounted at 24%. (13.8% for the country risk 10.2% for the operation risk). We also like the way the IPP is structured in that all of the major inputs are hedged either by LT agreement or its revenue cost make up is in USD. We expect the acquisition to be completed by November 2004 giving about 8 months contributions to the group. Upon completion of acquisition, we expect Jawa Power to contribute RM53.9m in earnings in FYE05 or 1.2 sen. However, this is all dependent on the timing of the closure date.

Making Kuala Lumpur an Energy epicentre. With the proposed acquisition YTLP is helping to make the SEA power grid a reality. The group currently has licenses to supply power to Singapore directly via Pasir Gudang station and Thailand via Paka power station. To our knowledge this is the only IPP with this exclusive capabilities, which can help stabilize the power needs of Malaysia's neighbours. Additionally with the acquisition of Jawa Power, YTLP has access to 4 major energy markets In SE Asia.

By venturing overseas does this mean that the local market is dried up? The venture into overseas is not new for YTLP, however the group has always been on the look out for other regulated assets within the region and in other developed countries. On the local front we believe that the group is waiting for the government to change their mindset in seeing the benefits of having more regulated assets in the country, which could fall under water, power, tolls, and possibly rail. Additionally with the push policy in Indonesia by IMF we would not be surprised if the group steps in to find another bargain investment opportunity.

Wessex Water

Wessex Water has closed its books for the FYE04 back in March. Turnover increased by 7.3% as a result of the price increase during the last financial year. However increases in interest expense negated revenue growth from increases in prices. Additionally a tax credit was used to offset the higher interest cost. Consistent with Wessex performance the group has posted a 1% return above assumed regulatory asset base (RAB) at the time of the tariff review. For FYE04 Wessex has made a 42.4m dividend payment which is line with the group’s payment back in 2002. Please recall that Wessex paid a whopping dividend last year.

Going forward. We look forward to another price revision this year under the previous 5-year plan. The group is in the midst of getting approval for its next 5-year plan which will include price revisions that are expected to make up for new regulatory environmental requirements. Decision from OFWAT is expected by August 2004.

Higher Interest rates a blessing for YTLP. With the global financial markets gearing for a higher interest rate framework over the next two years, we see YTLP as one of the few beneficiaries to this scenario. With cash hoard of close to RM4.7bn as of 3QFY04 and having locked in interest rates to be in line with the group's investment horizon as a strengthening mechanism for the group. For every 1% rise in interest rates the group is poised to accumulate an additional RM48.0m in cash to use for its investment plans.

Epilogue
The group has just finished its 1 for 2 share spilt as of end June. The new enlarged share cap stands at 4,520.0m. With the inclusion of Jawa Power into the group we foresee improve in earnings by 12.3% for next year, assuming the acquisition is complete by November. With the inclusion of Jawa Power we have projected the group's fair value to increase by 20 sen to RM2.10 from our previous target of RM1.90 (based on new share cap).

We are admirers of YTLP and management's approach of doing business in striving to trim set-up or investment costs, manage the assets efficiently, and to operate a sustainable business model. From the model the group is insulated from wild gyrations of the volatile business environment. Underpin by the group's impressive track record be it domestic or overseas, we see YTLP to be the benchmark or assuming the part as a role model within the utilities industries in SEA region.

Daniel Griffin (dg@avenue-securities.com)
Avenue Securities Sdn Bhd

 

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