KUALA LUMPUR (Dec 26): Affin Hwang Capital Research has upgraded YTL Power International Bhd to “Buy” at 72 sen with a higher sum-of-total-part (SOTP) based target price of 95 sen (from 85 sen).

In a note today, Affin Hwang said it expects YTL Power to maintain its 5 sen annual dividend (6.9% dividend yield) supported by the earnings/cash flow from Wessex Water.

It noted that although the Water Services Regulation Authority for England & Wales is cutting the return on capital from 3.6% to 1.92% starting CY20, the impact on earnings is manageable as the shortfall in revenue is compensated by a higher regulatory capital value run-off rate.

“While the operating environment of other operating entities (YES Communications and Power Seraya) remains challenging, we believe these entities are able to continue their operations without capital injections from YTL Power,” the research house said.

The research house expects YTL Power’s earnings to start improving by late 2020 when its loss-making Singapore operations turn around and its 45%-owned associate Attarat Power Company starts contributing.

“After three to four years of a challenging operating environment, we now expect the market to consolidate, as the overall capacity will be reduced by another approximate 10% within the next two years, lowering the reserve margin to below the 30% minimum set by the Energy Market Authority,” it said.

It also expects the wholesale selling price to rise to the Uniform Singapore Energy Price level or higher.

According to Affin Hwang, at 0.45 times PBV, YTL Power now trades at sharp discount from its five-year average PBV of 0.8 times, which looks attractive.

As at 9.14am, YTL Power's price remained unchanged at 74 sen with a market capitalisation of RM5.68 billion.