This article first appeared in The Edge Financial Daily, on May 11, 2016.

YTL Power International Bhd
(May 10, RM1.47)
Maintain hold with a higher target price (TP) of RM1.60: We believe YTL Power International Bhd’s (YTLP) oil shale project has been revitalised with the entry of a new shareholder. However, earnings from the project should not materialise until 2019. We believe YTLP should be able to maintain dividends despite the new investment.

We are positive on management’s announcement to jointly undertake a US$2.1 billion (RM8.5 billion) 554mw oil shale-fired power plant and mine project at Attarat um Ghudran in Jordan with China’s Yudean Group. The Jordan project has been quiet since 2010, but has now found a new lease of life with a US$1.6 billion debt financing by China Export and Credit Insurance Corp. YTLP and Yudean would each hold a 45% stake in the project, while Eesti Energia would hold the remaining 10% stake.

According to management, the Jordan plant has a 30-year power purchase agreement with National Electric Power Co (Nepco), Jordan’s national electricity company, and would only start generating electricity in 2019. Nepco has the right to extend the term by an additional 10 years.

We estimate that the Jordan project may lift future annual earnings by about 10%, assuming it is completed as scheduled. It is reasonable to expect the project to generate a mid- to high-teen internal rate of return, given that independent power plants are still relatively new in Jordan.

We believe management should be able to maintain its annual dividend per share of 10 sen despite the new investment required for the Jordan project. YTLP’s equity portion of the Jordan project worth US$225 million is expected to be staggered over a few years. Besides that, the group has a healthy cash balance of about RM9 billion, while management does not foresee capital expenditure increasing for its existing businesses.

We maintain our “hold” rating on YTLP with a revised 12-month TP of RM1.60 (from RM1.52) on an unchanged 10% discount to our realised net asset value of RM1.78. While the Jordan project provides YTLP with a growth angle, the earnings contribution will likely take time to bear fruit. In the short term, YTLP still lacks immediate catalysts due to regulatory and competitive headwinds in its foreign operations. — Affin Hwang Investment Bank, May 10