YTL Power International Bhd
(Oct 16, 75.5 sen)
Maintain sell with an unchanged target price of 71 sen: The management remains sanguine about 60%-owned YTL Communications Sdn Bhd’s prospects in spite of a challenging road thus far, including setbacks for the WiMAX technology and the recent non-renewal of the 1BestariNet project. The management is optimistic about new opportunities for the mobile services arm, YTL e-Solutions Bhd (YES), underpinned by the launch of the fifth-generation (5G) technology, potential awards of low-frequency spectrums, the roll-out of Terragraph wireless broadband, and cost savings from infrastructure-sharing under the National Fiberisation and Connectivity Plan. Upbeat that YES would appeal to foreign investors; the group does not discount the possibility of roping in a strategic equity partner for YES.
Meanwhile, YTL Power International Bhd is eyeing the 700MHz spectrum, which the management believes would boost YES’ competitive advantage. The spectrum assignment is targeted for completion by the second quarter of 2020 (2Q20) to 3Q20. We believe the 700MHz spectrum would reduce YES’ handicap against the big three telecommunications companies (Maxis Bhd, Axiata Group Bhd [Celcom] and DiGi.Com Bhd) and U Mobile Sdn Bhd. Unlike its peers, which currently hold the 900MHz spectrum, YTL Power does not own low-frequency spectrum holdings. It transmits solely via high-frequency 2.3GHz (30MHz) and 2.6GHz (20MHz).
Given the uncertainty about tower arrangements following the non-renewal of 1BestariNet, we believe YTL Power would benefit from the new 700MHz spectrum resource, which would likely reduce YES’ network capital expenditure and transmission operating expenditure, assuming that spectrum costs are reasonably affordable for YTL Power.
In spite of a transforming telco landscape, we believe the group is not out of the woods yet. Earnings and regulatory headwinds include: i) the possibility of a worse-than-expected drag from the early termination of the 1BestariNet contract; ii) possible sustained losses on PowerSeraya due to an oversupply in electricity markets, coupled with the impending removal of government-vesting contracts; and iii) regarding Wessex Water Services Ltd: the government’s clampdown on gearing limits could result in reduced repatriation of dividends. Therefore, we prefer to avoid the stock for now in spite of its multi-year-low valuations, coupled with the long-term projects in the pipeline. — TA Securities, Oct 15