Analysts' Recommendation

Mayban Securities reaffirms BUY for YTL Power

Equity Focus (Mayban Securities), 22 September 2004

YTL Power: The international multi-utility provider

YTL Power International
Fair value: RM3.40

By Tursina Yaacob

• On the acquisition trail. We understand that YTL Power is still on an acquisition trail after our recent meeting with the management. Based on its past acquisitions, we firmly believe that YTL Power would invest in more regulated-assets. The company’s strengths are its 1) predictable and steady cashflow, 2) huge cash hoard, 3) strong management team and 4) attractive dividend yield. We reaffirm our BUY recommendation. Its fair value of RM3.40 per share is almost double its current share price.

• Earnings boost in FY05. The expiry of YTL Power’s supplemental power purchase agreement with TNB in December 2003 has reduced the group’s power generation income in FY04. Nevertheless, we are upbeat on the group’s FY05 earnings, which should receive a boost from Wessex Water’s tariff rate hike and maiden contribution from 35%-owned Jawa Power.

Malaysia still offers opportunity. We see potential in YTL Power expanding its operations in Malaysia. Though growth is limited in the power industry, we believe YTL Power, with experience gained from Wessex Water, is eyeing the local water and sewerage concessions. However, YTL Power would only participate once the water and sewerage industry is fully regulated.

Undemanding valuations. YTL Power is trading at PER05 and PER06 of 5.1X and 4.6X respectively, which is significantly lower than Malakoff’s PER05 of 10X. The company offers a break-up value of RM3.61 per share. This composite valuation is based on a PER of 10X for the power generation (similar to Malakoff’s) business, a PER of 10X for the water and waste water business, and a PER of 20X for the electricity transmission operations respectively.