YTL Corp intends to privatise YTL Power, says Maybank IB

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KUALA LUMPUR (Dec 17): YTL Corporation Bhd (YTL Corp) has publicly stated its intention to eventually privatise its 51.4%-subsidiary YTL Power International Bhd (YTLP), according to a report released this morning by Maybank Investment Bank Bhd (Maybank IB).

A check with Bursa Malaysia and YTL's website shows that YTL Corp has not made any official public announcement on the privatisation move.

But this morning, Maybank IB said its present target price revision of YTLP to RM1.80 from RM2.20 while maintaining their "Buy" call is centered around the eventual privatization of the subsidiary.

"With YTLP's share price having fallen 15% year-to-date and contributing about 60% of YTL Corp's profit before tax, we believe YTLP would be first on the list of privatisation targets within the YTL stable of listed companies," Maybank IB said in their "Company Update" report today (Monday).

"Our target price (of RM1.80) implies a price-earnings ratio of 11.7 times and price-book ratio of 1.3 times in FY13. Investment thesis centers on the company eventually being privatised," the research house added.

Maybank IB believes that it makes sense for YTL Corp to privatise YTLP through a share swap as the swap ratio (share price of YTL Corp to YTLP) is currently close to historical highs.

A privatisation through a share swap would be in spite of the fact that a share swap may not be in the best interest of YTLP minority shareholders as a share swap is not ideal for realising value, depending on the offer premiums.

At 12.30pm noon break, YTL Power was down 2 sen at RM1.50 per share.

The main risk to the research house's evaluation on the matter revolves around the possibility of YTLP becoming a value trap if no privatisation offer is made.

"In the past 12 months, YTLP management has reduced interim dividend per share (DPS) to just a quarter of the previous run-rate, resulting in a significant de-rating of the stock. While valuations are now at trough levels, a re-rating requires catalysts"

"This probability of YTLP raising dividends or embarking on accretive acquisitions in the near term is low in our view," Maybank IB said.

For the financial year ending June 2012 (FY12), YTLP registered a recurring net profit of RM1.18 billion, down from RM1.38 billion registered in the previous financial year (FY11). This is despite FY12 revenue of RM15.87 billion being higher than FY 11 revenue of RM14.66 billion.

Maybank IB has increased FY13 net profit forecast by by 3% and lowered FY14 net profit forecast by 7% citing changes of higher depreciation for the Malaysian Independent Power Producers (IPP) and lower losses for their Wimax business.

"We also cut DPS assumption to 3.8 sen (from 4.7 sen) to reflect the latest run-rate. This implies a net dividend yield of 2.5% based on current share price," the research house said.

"Management has reduced interim DPS to just a quarter of the previous run-rate, resulting in a significant de-rating of the stock. YTLP has ample scope to raise dividends, but we believe this would only happen post-privitisation," Maybank IB added.

"It is plausible that the enlarged YTL Corp would raise dividends and thus re-rate, enhancing returns for the original YTLP minority shareholders," the research house concluded.