YTL Power upgraded on attractive valuation

YTL Power International Bhd (YTLP) saw an upgrade by Affin Hwang Capital, with the research house changing its call to buy from a previous sell and setting a new target price of 95 sen from 85 sen.

“After several years of earnings declines, we expect YTLP’s earnings to start improving in FY21E on the turnaround of Power Seraya and the maiden earnings contribution from APCO (Attarat Power Company),” says Affin Hwang analyst Ng Chi Hoong.

Ng explains that YTLP is now trading at a sharp discount from its five-year average, leading to the stock looking rather attractive. This, along with the expectations that the group’s earnings will start improving by late-2020 from the turnaround of the group’s operations in Singapore (Power Seraya) and the earnings contributions from APCO in Jordan.

Power Seraya and its peers are currently loss-making, as they remain affected by the overcapacity in the Singapore wholesale energy market. However, Ng now expects the market to consolidate, as the overall capacity will be reduced by another 10% within the next two years, lowering the reserve margin below the 30% minimum set by the Energy Market Authority.

At the same time, YTLP is expected to maintain its five sen annual dividend, notwithstanding the weaker earnings forecast, supported by the earnings and cash flow from Wessex Water in the UK.

“Although Ofwat, the UK water industry regulator, is cutting the return on capital from 3.6% to 1.92% starting in 2020, the impact on earnings is manageable, as the shortfall in revenue is compensated by a higher regulatory capital value run-off rate,” says Ng.

He also believes that Yes Communications and Power Seraya will be able to continue operations without capital injections from YTLP, despite their challenging operating environments.

YTLP’s shares closed unchanged at 74 sen on Dec 26 with 26.9 million shares changing hands.

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