YTL Power International Bhd
(June 29, RM1.58)
Maintain market perform with a target price (TP) of RM1.68: Last weekend, The Edge weekly reported that YTL Power is one step closer to recovering up to RM700 million from Petroliam Nasional Bhd (Petronas) for overpaying for gas supplies in the course of two local power plants, namely the Paka and Pasir Gudang power plants. It was reported that arbitrators in London have reached a decision in favour of YTL Power, after conducting evidential hearings since March. However, the exact quantum of the settlement, when and how it will be paid was not made clear as the settlement is still being finalised.

We do not expect this to have a fundamental impact on YTL Power, but more of a one-off claim for the disputed sum stemming from a disagreement between YTL Power and Petronas that dates back to 1997 on the gas price the first independent power producer (IPP) had to pay. 

The news article reported that YTL Power in 1993 entered into a gas supply agreement with Petronas, where the price of the gas to be supplied was calculated based on a market price-related formula at a discounted price. However, this was withdrawn during the 1997 Asian financial crisis as the government adopted a fixed gas price of RM6.40/mmBtu.

In fact, it was already reported in YTL Power’s annual report for the financial year ended June 30, 2014 (FY14) that RM261.1 million, up from RM254.6 million for FY13, was recognised as the amount recoverable from suppliers in relation to the arbitration. 

Should YTL Power win this arbitration, the RM700 million claim would add only 8.5 sen per share to its current revised net asset value (RNAV) of RM1.87 per share, assuming it’s a cash settlement. Hence, there is only a 4.5% increment in RNAV valuation.

We believe the power purchase agreement (PPA) extension of the two power plants is more important since the PPA for the Paka power plant will expire in September, and early next year for the Pasir Gudang power plant. So far, there is no news of the PPA extension for Gen1 IPPs, although the concession expiry is fairly soon.

Being in the utility concession business, YTL Power’s earnings are fairly resilient. However, there are concerns about the Singaporean operations as the electricity market there remains competitive with new capacity coming on stream, although the strong Singapore dollar should benefit YTL Power. Meanwhile, the earnings prospect for Yes is set to improve, judging from its growing subscriber base. For Wessex Water, earnings are expected to be fairly flattish until it gets the next tariff revision. 

We maintain a “market perform” valuation, with TP maintained at RM1.68 per share, which is at a 10% holdings company discount to its RNAV of RM1.87 per share. 

Among the risks to our call are lower dividend payouts, widening Yes’ losses and a rise in global economic risks, especially in Europe. — Kenanga Research, June 29

This article first appeared in The Edge Financial Daily, on June 30, 2015.