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This article first appeared in The Edge Financial Daily on June 14, 2018

YTL Power International Bhd
(June 13, 96 sen)
Downgrade to hold from buy with an unchanged target price (TP) of 85 sen:
With the stock having gained 19% post our upgrade on May 25, 2018 we no longer view risk-reward as being compelling. Upside risk hinges on Tanjung Jati A (Tj Jati A) successfully achieving financial close. We note the Yeoh family has been acquiring shares directly from the market in April 2018 and May 2018.

Compilation of exchange filings shows that the Yeoh family had directly acquired about 91 million shares from the market in April 2018 and May 2018, representing on average about 9% of daily volume. This represents a deviation from past practices, where YTL Power International Bhd would conduct share buy-backs and subsequently distribute treasury shares as stock dividends. The inadvertent read-through would be that of a potential privatisation. However, we caution that any potential privatisation would likely be in the form of a share swap (into YTL Corp Bhd shares), not a cash offer.

There remains no positive progress over YTL Power’s 80%-owned greenfield coal plant Tj Jati A in Indonesia. The project has still not achieved financial close, with power purchase agreement terms having already been revised (likely downwards) in March 2018. Based on management’s original internal rate of return guidance, we estimate the project could have added about 45 sen to our TP. However, the repeated delays to achieving financial close point to significant execution challenges to be overcome.

Our earnings forecasts and 85 sen TP are unchanged. Our TP is based on sum-of-parts, with the operating entities each valued by discounted cash flow. With the stock having exceeded our TP following a 19% gain from our upgrade on May 25, 2018 we downgrade the stock back to “hold”. In our view, further upside hinges on Tj Jati A successfully achieving financial close. — Maybank IB Research, June 12

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