YTL Power seen with stable fundamentals backed by key concession assets

TheEdge Fri, Nov 08, 2019 10:12am - 4 years View Original


YTL Power International Bhd
(Nov 7, 69 sen)
Maintain outperform with a lower target price (TP) of 80 sen:
YTL Power International Bhd’s share price has been charting new lows on concerns over near-term earnings while new earnings streams could take time to crystallise. However, we believe the counter is oversold, having plunged 19% year to date (YTD), with stable fundamentals backed by key concession assets. Value of Wessex Water Ltd alone minus group’s debts exceeds YTL Power’s current share price. Moreover, it paid five sen dividend, which translated into a yield of over 7%.

YTL Power’s key earnings contributor Wessex Water, which experienced lower earnings in financial year 2019 (FY19), may see a lower return of rate, currently about 5%, over its asset base under the new regulatory period (RP) in 2020-25 where it plans a £1.2 billion investment programme over this period. Having said that, it still expects to generate similar earnings level with a current net profit of about £100 million a year in the new RP as the growth in asset base should be sufficient to offset the cut in tariff rates in a full five-year basis. As such, we may see lower earnings in the initial year on lower tariff before improving gradually over the later years as sales volume increases. Nonetheless, in ringgit terms, earnings from this unit are expected to be impacted by foreign exchange volatility due to the uncertainty caused by Brexit.

After a substantial reduction in pre-tax loss in the fourth quarter of FY19 (4QFY19) due to higher volume, YTL PowerSeraya Pte Ltd expects to see widening losses again, at least in the next two quarters before seeing improvements when the vesting contract which ends next year and “take-or-pay” gas contract expires in 2023. Meanwhile, the group’s mobile unit posted a surprise pre-tax profit of RM10 million in 4QFY19, thanks largely to 1BestariNet’s positive contribution. However, the non-renewal of the 1BestariNet contract by the ministry of education will put the unit back to the red again as the current 500,000 YES subscriber base is insufficient to turn the unit around. Nonetheless, taking cue from the recent failed merger talks between Axiata Group Bhd and Telenor ASA, there is possibility that this business segment may be on the lookout for merger and acquisition possibility.

With the expected weaker earnings from Wessex, PowerSeraya and YES, coupled with the Paka power plant’s extension power purchase agreement contract expiring in June 2021, near-term earnings are set to be lacklustre. Meanwhile, the group’s two greenfield projects — 45%-owned 554mw oil shale-fired Attarat Power Plant in Jordan is scheduled to start operation in mid-2020, while 80%-owned two times 660mw coal-fired PT Jati Power Plant in Indonesia is still pending financial close and once approved, will take at least four years to build. In view of continued losses at PowerSeraya and the contract loss from 1BestariNet, we cut FY20/FY21 earnings estimates by 17%/14%. However, net dividend per unit is maintained at five sen, which could be distributed in a quarterly basis versus once a year currently.

Although facing rather bleak earnings outlook, we believe YTL Power is a bombed-out stock having fallen 19% YTD. The last time we see such price level of 67.5 sen was 20 years ago during the 1998 Asian financial crisis. Furthermore, based on our estimated Wessex Water’s regulated capital value of £2.87 billion minus group debt of RM9.97 billion, it is worth 71 sen. In addition, the counter offers an above-average yield of more than 7%. As such, we maintain our “outperform” rating at revised TP of 80 sen from 82 sen previously. Risks to our call include both PowerSeraya and YES losses worsening. — Kenanga Research, Nov 7

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