This article first appeared in The Edge Financial Daily, on October 5, 2015.

YTL Power International Bhd
(Oct 2, RM1.62)
Maintain hold call with an unchanged target price (TP) of RM1.60: The stock lacks near-term rerating catalysts and earnings could shrink after the expiry of Malaysian power purchase agreements (PPAs).

Despite stable earnings contributions from Wessex Water in the United Kingdom, YTL Power is facing headwinds from YTL PowerSeraya in Singapore and YTL Communications Sdn Bhd that operates the Yes 4G mobile network.

PowerSeraya’s electricity sales had been falling over the last four consecutive years to a multi-year low in the financial year ended June 30, 2015, while Yes 4G has been bleeding since 2010, to the tune of a RM200 million pre-tax loss annually.

The expiry of its Malaysian PPAs in September could also dampen earnings growth. But the impact may be offset by a new PPA for the 808mw Paka plant, for which YTL Power has won a short-term capacity generation contract.

YTL Power will continue to bid for regulated assets overseas, given its large cash hoard of RM9.5 billion, to compensate for potentially lower earnings. Nevertheless, the weak ringgit could be a deterrent to pursue overseas regulated assets.

Earnings from PowerSeraya and Wessex account for the bulk of the group’s net profit, so earnings are sensitive to changes in the British pound and Singapore dollar rates. — AllianceDBS Research, Oct 2