Analysts' Recommendation

Avenue Securities makes ‘market perform’ call on YTL Power

Business Times Malaysia, 22 December 2003

AVENUE Securities Sdn Bhd has made a “market perform” call on YTL Power International Bhd for its sustainable earnings and above average dividend yield.

“(YTL Power) reminds us of a text book version of what a defensive or utility stock is,” it said in a research note dated December 12.

Analyst Daniel Griffin said in the note that the stock is attractive as a dividend play and the company’s share buyback scheme should give the stock support. Avenue has a price target for YTL Power at RM3.80. The stock last closed on December 19 at RM3.24.

The brokerage also said that the group has paid out 36.3 per cent of its earnings to shareholders as dividends since its listing in 1997.

“Being the first independent power producer in the country, YTL Power was able to secure higher internal rate of return than other independent power producers (IPPs). We estimate that the power generation assets enjoy an IRR rate of 15-19 per cent,” it added.

By being the first IPP in the country, YTL Power was able to enter into a take or pay contract with Tenaga Nasional Bhd (Tenaga). The brokerage said that under the PPA, Tenaga must take at least 90 per cent of the capacity of the two plants, which secures cash flows for the group over the long term.

“This also helps to diminish the risk of lower off take during periods of higher reserves, which we saw in 2003, as the groups’ cash flows are tied to its long term PPA that expires in 2015,” Avenue said.

Avenue also sang praises on YTL Power’s acquisition of Wessex Water Services Ltd in May 2002 as it added 35.7 per cent to the company’s earnings per share for the financial year ended June 30 2003.

According to the brokerage, Wessex’s operating environment is regulated by the Office of Water Services (Ofwat) ensuring that the water industry is shielded from external shocks by allowing consumers to enjoy uninterrupted water supply at reasonable rates and allowing water players to earn reasonable rates on their investments.

It added that Wessex will be allowed to increase its tariffs by an average rate of 3.8 per cent and 4.5 per cent for the financial year 2004 and 2005 respectively, according to the last tariff adjustment recognised by Ofwat.

“We envisage similar characteristics for the forthcoming revision for the financial year 2005 where there will be an initial upward revision after two years of stagnant rates, to be followed by a similar two years of increases,” Avenue said. It said it expects Wessex’s profit after tax to increase by an average of 26 per cent over the next two years with the two upcoming tariff revisions.

Avenue also said that Wessex may pay dividends soon.

“Under the old management of Enron, Wessex paid out ?40 million (?1 = RM6.94) in dividends which at current rates stand at RM240 million or 74 per cent of YTL Power’s current gross payout. Management has indicated that there is a potential for dividend increases in the near future, it added.

Meanwhile, international ratings house Standards & Poor’s (S&P) has also raised YTL Power’s credit rating one level higher to BBB from BBB-. The BBB rating is the second-lowest investment grade. The outlook is stable.

The upgrade reflects YTL Power’s successful integration of Wessex Water Services Ltd, which it acquired from a unit of Enron Corp, S&P said.

“Although YTL Power lacked experience in the water and sewerage business, it has kept the management team intact at Wessex, which has enabled the subsidiary to continue to perform well, under the protection of an established regulatory regime,” S&P said on December 17.