CSFB: YTL Power FY04 results in line; fully valued
Credit Suisse First Boston, 27 August 2004
By Tan Ting Min
YTL Power International
FY04 results were in line; fully valued
Based on reported profits, its net profits were up 38% YoY, but if the adjustments on the new accounting policy, MASB 29, were ignored, the net profits grew only 4% YoY.
YTL Power’s supplementary power purchase agreement had expired in December 2003, which may have contributed to the 21% drop in the power division’s EBIT.
100%-owned Wessex Water EBIT was up 29.5% YoY (without the effects of MASB 29), partially boosted by the strengthening Pound Sterling.
We have revised up FY06 profits by 6.8%, as Ofwat has allowed for a higher return in 2005-06. We maintain an UNDERPERFORM rating. Our estimated fair value of RM1.73 suggests a 4% upside, versus the market upside of 28%.
YTL Power’s FY2004 result review
YTL Power’s FY04 results were 2% and 4% below market and our forecasts.
Based on reported profits, its net profits were up 38% YoY on the back of a 7% increase in revenue. The figures have been completely distorted by the adoption of a new accounting policy, MASB 29, relating to “employee benefits.” YTL Power has
adjusted its FY03 net profits downward by writing off RM157.2 mn from RM603.4 mn to RM446.3 mn. Ignoring the MASB 29 impact, net profits would have grown by a mere 4% YoY.
YTL Power’s supplementary power purchase agreement expired in Dec 2003, which may have contributed to the 21% drop in the power division’s EBIT.
100%-owned Wessex Water EBIT was up 29.5% YoY (without the effects of MASB 29), artificially boosted by the strengthening Pound Sterling, which has risen some 9.8% YoY. In addition, there was a loan repayment of some ₤200mn, which carried an interest rate of about 5.7%.
YTL Power is actively bidding for regulated projects around the world, e.g., National Grid Transco (NGT.L, p451.75, OUTPERFORM, TP p467.00, UW), where the results will likely be known in February 2005. Although YTL Power is in a net gearing level of 171%, it has gross cash of RM4.4 bn, which will allow the company to seek more investment opportunities overseas.
We have revised up FY05 profits by 6.8%, as Ofwat (the water and sewerage regulator in the U.K.) has allowed Wessex a price increase of an average 4.2% p.a. over 2005-10, with the highest rate increase of 7.4% effective from 1 April 2005. Ofwat is allowing posttax cost of capital of 5.1%, which we believe is higher than the
previous rate of 4.75%.
YTL Power’s expertise through Wessex Water could be replicated to solve Malaysia’s water and sewerage woes, hence YTL Power is likely to play a role in Malaysia’s water system in the future.
The Pound Sterling has strengthened further against the ringgit by another 4.5% since 1 July 2004, and if the rate remains at current level, Wessex Water will get a boost to its FY05 profits.
Rating and target price
Our target price of RM1.73, is based on RAB for Wessex Water and DCF for the power plants. We have assumed that Wessex Water’s RAB (regulated asset base) were to be revalued using current forex of ?1:RM7. Maintain UNDERPERFORM. Net dividend yields are relatively high at 4.3%.