Value emerges for YTL Power as shares near 20-year low

By Ranjit Singh

YTL Power International Bhd’s shares have been nearing its 20-year low level at 67.5 sen per share and analysts tracking the company are saying that value has emerged for the company. The counter had traded at 67.5 sen after the Asian Financial Crisis in 1998.

The company, which was listed in 1997, has never failed to pay a dividend in its 22-year history and has one of the most attractive dividend yields on Bursa Malaysia at around 7%. Kenanga Research in a research report dated Nov 7 stated that “it (YTL Power) is oversold plunging 19% year-to-date with stable fundamentals backed by key concession assets”.

The research firm has an 80-sen target price for the stock.

YTL Power’s principal subsidiaries are involved in power generation, multi utilities, water and sewerage, and mobile broadband network. It currently operates in Malaysia, Singapore, the UK, Indonesia and Australia, with stakes in projects under development in Jordan and Indonesia.

The independent power producer pursues a strategy of acquiring regulated assets operating under long-term concessions. A key component of the company’s strategy is its practice of funding the debt component of its acquisitions and greenfield projects mainly through non-recourse financing, which has ensured it only invests in projects that are commercially viable on a standalone basis.

Non-recourse financing is a type of commercial lending that entitles the lender to repayment only from the profits of the project that the loan is funding and not from any other assets of the borrower. Such loans are generally secured by collateral.

YTL Power derives the bulk of its revenue from operating various regulated utility assets under long-term concessions and/or licences enabling the company to achieve stable earnings and mitigate the downside risks arising from economic uncertainties or changing operating conditions, both in Malaysia and globally.

For FY19, YTL Power’s overseas operations accounted for 85.6% of the group’s revenue compared to 86.2% in FY18. Malaysian operations contributed 14.4% of group revenue in FY19 as opposed to 13.8% in FY18.

The company recorded a net profit of RM411.5 mil on the back of revenue of RM11.7 bil for FY19.

YTL Power’s 100%-owned company, YTL PowerSeraya Pte Ltd, which carries out its merchant multi utilities business, has a long track record of being one of the most efficient operators in Singapore.

Analysts are expecting YTL Power’s multi utilities business to come under intense pressure. The company acquired PowerSeraya in 2009 for S$3.8 bil (RM9.2 bil) and since the acquisition, Seraya has generated a cumulative profit before tax (PBT) of RM4.4 bil, which translates to 48% of the acquisition cost.

However, PowerSeraya has met headwinds and registered its first loss before tax (LBT) in FY19 due to slower economic growth and intense competition following Singapore’s decision to open up its retail electricity market since November 2018.

The oversupply in the retail electricity sector in Singapore since the opening up of the market has affected contract margins. According to AllianceDBS Research, many power generation companies in the island state have locked in LNG take or pay contracts until 2023, which effectively makes fuel a fixed cost.

The research firm is expecting a RM241 mil LBT for PowerSeraya in FY20 versus a RM242 mil LBT in FY19 due to high operating costs and stiff competition.

An analyst with a local brokerage tells FocusM the segment’s contribution might still be negative in the near term due to unfavourable market conditions.

“The electricity market needs to go through a consolidation phase and will only recover in the medium term and we believe that YTL Power’s multi utilities business will take time to return to profitability,” says the analyst.

One of the crown jewels of YTL Power is Wessex Water in the UK, which is 100% owned by the company. Wessex Water, a water and sewerage company, saw its regulated asset value increase over time. Its regulatory capital value has grown from £1.3 bil (around RM7 bil) when it was acquired by YTL Power in 2002 to £3.3 bil as at June 30, 2019.

It serves around 2.8 million customers across a geographic area of approximately 10,000 sq m in the southwest of England including Dorset, Somerset, Bristol, most of Wiltshire and parts of Gloucestershire and Hampshire.

Wessex Water registered a revenue of RM3.4 bil and PBT of RM739 mil in FY19 compared to a revenue of RM3.36 bil and PBT of RM991 mil for FY18. The higher revenue was due to an increase in the price allowed by the industry regulator while the decline in PBT was mainly due to the absence of one-off pension credit recognised in the preceding year and higher finance cost in FY19.

YTL Power has an 80% equity interest in Tanjung Jati Power, an independent power producer which is undertaking the development of Tanjung Jati A, a two-660MW coal fired power project in Java, Indonesia.

Tanjong Jati Power has a 30-year power purchase agreement (commencing from the plant’s commercial operation date) with PT PLN (Persero), Indonesia’s state-owned electric utility.

YTL Power also owns a 45% equity interest in Attarat Power Co (APCO), which is developing a 554MW oil-shale fired mine mouth power generation project in Jordan. APCO has signed a 30-year power purchase agreement (including a construction period of 3.5 years) with the National Electric Power Co, Jordan’s state-owned utility.

Its mobile unit, which charted a pretax profit of RM10 mil for its 4QFY19, is deemed as a “surprise” by Kenanga Research due to 1BestariNet. However, going forward, the research firm says the non-renewal of 1BestariNet by the government will result in losses for the mobile unit. This is because its subscriber base of 500,000 of YES is insufficient to turn the unit around.

AllianceDBS Research indicates in its report that YTL Power had been undertaking share buybacks in recent months following the weakness in its share price.

The research firm also says that at current levels, the discount to book value which stands at 56% implies that its mobile and Singapore operations are completely written off.

Kenanga Research says that at current levels, the stock is “bombed out”. “If the valuation of the company is based on Wessex Water solely, it’s worth 71 sen,” says the research house.

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