ECM Libra Avenue: BUY YTL Power International; target price RM2.98
ECM Libra Avenue, 29 January 2007
YTL Power International Berhad
Current Price RM 2.29
Fair Value RM2.98
Powering up for more acquisitions?
Regulated asset play
YTLPI kicked start as an IPP in Malaysia but expanded into a global regulated asset player. From the early days of the Paka and Pasir Gudang power plants, the Group has added the Wessex Water (100%) concession (purchased at a distressed value of GBP1.2bn and is now worth GBP1.8bn in little more than 2 years), the 200-year Electranet (33.5%) power transmission concession in South Australia and the 30-year Power Purchase Agreement with PT Jawa Power (35%) in Indonesia, amongst others.
Promises strong stream of cash flows in perpetuity
YTLP’s regulated assets assures steady and strong stream of cash flows, and in the case for Wessex Water, in perpetuity. It has a cash hoard of RM6bn and expects more than RM900m cash flows every year. The Group had always been acquiring cash-flow generating regulated assets and been holders of long-term concessions for one major reason – predictable cash flows for long term.
M&A the way forward
After 3 major successful acquisitions, and given its track record, we do not rule out the possibility of YTLP acquiring more regulated assets abroad. Pending is a bid for 800MW coal-fired power plant next to Jawa Power.
Wessex to drive growth
Over the next three years, YTLP’s growth will be driven mainly from price increases granted by the UK Office of Water Services (OFWAT) - 5.6%, 4.0% and 2.9% for 2007, 2008 and 2009, respectively. Contribution from Wessex should rise due to higher capex and higher water tariffs.
View PPA re-negotiation positively - neutral impact
PPA re-negotiation is ongoing and we believe the implementation would only take place in early 2008. Contribution from power division is relatively lower at 29% compared to Wessex Water’s 66% even though a 10% cut in tariff would slash about 5-6% of YTLP’s pretax profit. Nevertheless, any changes to the PPA would have neutral impact on YTLP’s cash flow as the lower tariff rate would be compensated by a longer concession period.
Cash payout and dividend in specie adding up to higher return of 37-39%
Policy on treasury share distribution will continue, implying that investors can expect a 7-9% yield from cash dividend (5-6%) and share yield (2-3%) going forward. This assumes that YTLP sticks to its 50% dividend payout policy. Plus the expected capital appreciation of 30% would raise our expected return to 37-39%.
Sum-of-parts approach values at RM2.98 on a fully diluted basis
Our sum-of-parts approach values the stock at RM3.35 based on shares outstanding, and RM2.98 on a fully diluted basis assuming full conversion of warrants and exchangeable bonds. The fair value would have been higher if not for the dilution caused by shares issued at RM2.227.