CLSA upgrades YTL Power - OUTPERFORM
CLSA Asia Pacific Markets, 21 February 2005
Current Price: RM1.80
Target Price: RM2.00
Playing catch up
We are upgrading YTL Power to an O-PF with a target price of RM2.00. After lagging its peers in 2004, YTL Power, which offers better yield than its IPP peers, decent 3-year EPS cagr of 13.6% plus upside risk from overseas acquisitions is expected to play catch up. Between YTL Power and YTL Corp, we prefer the latter for its cheaper valuation, stronger growth and upside from asset unlocking.
We have upgraded our FY05-07 forecasts by 6-10% to reflect interest cost savings from the conversion of its Euro bond and additional income from its O&M operations in Indonesia. Latest forecast projects 3-year EPS cagr of 13.6% based on existing operations. Downside risk from a potential ringgit revaluation is marginal. Every 10% change in RM/USD varies 06 EPS by 3.4%.
More acquisitions in the pipeline
YTL Power, Tanjong, AIG, and Mitsubishi/CLP, have been short-listed for the acquisitions of 100% stake in Intergen. The Intergen portfolio consists of 7844MW of generating assets via 10 international plants and is reported to be worth US$4.8bn including US$3.3bn of debt. Though YTL Power is highly geared (1.7x net) due to project debts at its power and water divisions, it has net cash of almost RM1.0bn at the company level and generates real free cash flow of about RM800m a year.
YTL Power has a two prong dividend policy – cash (gross yield of 5.6%) plus share dividend. YTL Power uses surplus cash to buy back shares (limit downside risk) which are redistributed as dividend in specie to shareholders – a 1-for-50 (2%) in 2002 and another 1-for-25 (4%) recently. Including the amount spent on share buy back, YTL Power has increased its payout ratio from 10% in FY98 to 85% of profit in FY04.
Laggard in 2004
Despite offering highest dividend yield of 5.5% in the sector, YTL Power’s performance lagged its peers – Malakoff and Tanjong – in 2004. With 13.6% 3-year EPS cagr and a sustainable yield of more than 5% plus upside risk from overseas acquisitions, YTL Power is ripe to play catch up. We are upgrading YTL Power from U-PF to an O-PF. Target price raised to RM2.00 on 5% (historical average) premium to NPV.
We have upgraded our forecasts for YTL Power by between 6-10% over FY05-07 to reflect the following developments.
• Interest savings of RM42m a year from the buy back and conversion of USD$150m bond.
• Approximately RM12m of O&M income from Jawa Power plant in Indonesia.
Following the earnings revision, we project YTL Power to deliver 3-year EPS cagr of 13.6% over FY04-07 underpinned by lower interest charges; associate contribution from Jawa Power and water tariff rate hike at Wessex Water. Present earnings landscape would change if any of the below pans out, offering upside risk to our present earnings forecast.
1. Additional sales from existing power plants. Under the present Power Purchase Agreement (PPA) with Tenaga, YTL Power sells 70.2% or 7450 mil kWh of electricity to Tenaga a year. We understand that both parties are in discussion to enter into Supplementary Agreement whereby Tenaga buys additional power from YTL Power at a renegotiated rate. This could be a win-win situation for both as Tenaga can buy cheaper electricity and retire its more costly power plants and/or defer the need for new planting up while YTL Power enjoys additional income from higher utilisation of its power plants. This could potentially enhance YTL Power’s net profit from less than 1% to as much as 5% depending on the amount of additional off take and pricing.
2. Acquisition growth. Failed in its attempt to acquire UK National Grid Transco, YTL Power is one of the five, short-listed for the acquisition of a 100% stake in US InterGen. The sale is reported to be worth US$5bn, including debt. InterGen is a global power generation firm, involved in the operating or building of a total of 17 power stations representing over 15,000MW. The Company has projects operating, under construction or in active development, in the United States, the United Kingdom, the Philippines, Colombia, Mexico, China, Turkey, Australia, the Netherlands, Spain, Germany and Singapore. InterGen is jointly owned by Shell-Bechtel on a 68%:32% joint venture. For more information on InterGen, please refer to www.intergen.com.
We have upgraded YTL Power’s NPV valuation from RM1.76 to RM1.92 after discounting its FY06 future cashflow. At current level, the stock is trading at 6% discount to NPV compared to its historical NPV premium of 5%.
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