Looking for catalysts for YTL Power

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KUALA LUMPUR: YTL Power International Bhd’s share price, one of the 30 component stocks of the FBM KLCI, has been lagging its peers in the past 15 months after it hit a peak at RM2.60 in November 2010.

The utility stock, which has a ballooning cash pile of RM8.68 billion, has been trading in the range of RM1.90 and RM1.75, unlike most of its KLCI counterparts which have headed higher and lifted the benchmark to a record high recently.

Shrinking dividend payments is one factor that makes YTL Power less appealing, said analysts, in addition to concerns over the huge capital investment requirement for its intensive 4G business.

However, some analysts believe there are potential catalysts that could spark interest in YTL Power. And the 4G business could be a boon to its future earnings instead of a burden.  

YTL Power’s 60% owned subsidiary YTL Communications Sdn Bhd (YTL Comms) is said to have won the national 1Bestarinet smart school project which involves providing broadband services to nearly 10,000 schools nationwide.

There has been no official announcement yet. The management at YTL Comms has been tight-lipped on this. However, TheEdge Financial Daily has learned that the work on the RM1.5 billion project has been going on for the past three months.

The project involves providing Internet access and a virtual learning platform to 9,924 schools across the country. Analysts reckon this project will boost loss-making YTL Comms, which is currently burning cash to roll out its Yes 4G WiMAX service.

For the six months ended Dec 31, YTL Comms incurred a net loss of RM197 million, more than six times its revenue of M30.6 million during the period. A year ago, the telco’s revenue was barely RM4.7 million, while net losses were RM27.7 million for the six-month period.

The ballooning losses were due mainly to the up front implementation costs to build the 4G network for scale in order to cover the whole peninsula.

Apart from the 1Bestarinet smart school project, an analyst said another catalyst to prompt a re-rating of the stock is the upcoming 4,500MW power plant-up cycle in Malaysia.

The bidding process for the 4,500MW power generation started recently with the 1000MW to 1,400MW gas-fired Prai power plant in Penang.

YTL Power, together with its Japanese partner Marubeni Corp, is among the nine bidders shortlisted for the Prai power plant project.

Affin Investment said it believes YTL Power will vie for the Pasir Gudang tender given the possibilities of sharing infrastructure with its existing power plant on site. The investment bank said YTL Power could be awarded a 700MW power plant project that will enhance its revised net asset value (RNAV) by 9% to RM2.67 per share.

YTL Power operates two power plants, one in Paka, Terengganu, and another in Pasir Gudang, Johor, with a combined capacity of 1,212MW.

Some analysts note that the valuation of YTL Power’s effective 4,556MW power assets in Singapore, Malaysia and Indonesia is low. Affin Investment said YTL Power’s power assets in the three countries are estimated to be 4.5 times earnings before interest, tax, depreciation and amortisation (Ebitda).

Comparatively, it said, 1Malaysia Development Bhd’s (1MDB) recent acquisition of Tanjong Energy Holdings Sdn Bhd’s power assets was priced at an estimated eight times Ebitda. This is a wide gap between the two valuations.

On YTL Power’s recent lacklustre share performance, analysts said it was mainly because the group has been trimming  its dividend payouts. According to some analysts, the group is hoarding its cash for M&A opportunities in expectation of an upcoming downturn. However, others point out the scepticism about the fast cash burning in the telecommunications business.

Some quarters believe cash hoarding is not a wise capital management policy as the group cannot afford to gear up for any M&A, considering its purchase targets are likely to be utility assets that should not have difficulty getting financing.

As at Dec 31, 2011, YTL Power had cash reserves of RM8.68 billion against total borrowings of RM15.82 billion. For FY11 ended June, its net profit rose to RM1.24 billion or 18.93 sen per share from RM1.2 billion or 18.6 sen per share in FY10. Revenue grew to RM14.66 billion from RM13.44 billion in FY10.

For 2QFY12 ended December, net profit rose 21% to RM313.8 million from RM259.22 million a year ago, while revenue was up 14% to RM4.09 billion from RM3.58 billion previously, driven by higher electricity sales in Malaysia and Singapore.

For 2Q, it declared dividends of 0.94 sen per share, half its usual 1.875 sen per share.
This article appeared in The Edge Financial Daily, April 9, 2012.