Analysts' Recommendation

Deutsche Bank upgrades YTL Power to BUY

Deutsche Bank, 20 September 2004

Growth story gradually crystallising; upgrade to Buy

YTL Power
BUY
Target price: 1.85 to 2.24

By Nicklas Olausson, CFA

Foundation for positive long-term performance; upgrading to Buy
Armed with RM4bn gross cash, a strategy to re-invest, broadening expertise and good timing, YTLP has the foundation for a long-term rerating. It is also emerging as a Malaysian water concept stock. Recent newsflow has been positive, especially on the UK water front. We have raised our valuation by 21% to RM2.24 and our call from Hold to Buy.

UK/US road show: positive newsflow
YTLP continues to look for investments to re-deploy its RM4bn war chest. We believe that Jawa Power being purchased at 4x PER, is only the start in Indonesia. There is also potential for YTLP to participate in Malaysia’s water sector restructuring further out. Meanwhile, Wessex got a favourable draft tariff review with an average 4.2% real price increase.

EPS and target upgraded; upside bias to ROEs
We have upgraded basic EPS by 5-26% and the DCF/RAB-driven target from RM1.85 to RM2.24 as we raise the Wessex valuation (in line with DB UK’s methodology) and include the 35% stake in Jawa Power. There is zero assumed for additional power sales or ‘option value’ on its cash pile. The latter is conservative given an expanding opportunity pool.

Yield (4%) and growth; attractive long-term investment
The ‘EB’ overhang is likely to remain in the near term, but a valuation gap has opened. YTLP has underperformed the UK water sector by around 15% in 2004 as the recent favourable water review has not been priced in locally. Ratings are undemanding at 11.8x FD FY06F EPS and low-risk 4% yield. Risks include rising bond yields, FX volatility and PPA re-negotiation.

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