YTL Power - Steady earnings but lower dividend payout HOLD

• We maintain our HOLD call on YTL Power International Bhd (YTLP), with a fair value of RM2.05/share based on a 15% discount to our sum-of-parts (SOP) value of RM2.42/share.

 

• YTLP’s 1HFY12 net profit of RM248mil came in within expectations, accounting for 48% of our FY12F earnings of RM1,168mil and 45% of street estimate’s RM1,244mil. Hence, we maintain FY12F-FY14F earnings.

• But YTLP declared a second interim single-tier dividend of 0.9 sen/share, half of the previous quarter’s, likely due to the group’s upcoming investment plans in new utilities and WiMax projects. The 1HFY12 dividend of 2.8 sen/share represents a payout ratio of 36% vs. our earlier assumption of 50%. Hence, we have reduced FY12F-FY13F dividends by 50%, which translates into an unexciting yield of 3%. 

• Sequentially, YTLP’s 2QFY12 pre-tax profit rose 28% to RM314mil due to:- (1) higher electricity sales and lower maintenance charges for the power division; (2) fair value adjustments for fuel and lower financing costs for PowerSeraya; and (3) higher forex gains which partly offset investment losses. 

• Overseas operations accounted for 88% of the group’s 1HFY12 pre-tax profit, for which the Malaysian-based gasfired power generation plants and 35%-owned PT Jawacontributed 23%, UK’s Wessex Water 28% and Singapore’s Power Seraya 49% (See Table 2). 

• In 1HFY12, the new mobile broadband division registered a higher loss of RM197mil (vs. RM28mil in 1HFY11) due to the division’s start-up and increasing fixed operating costs.

• The group plans to install Yes 4G connectivity in Proton’s soon-to-be launched P3-21A sedan and future models.While this is an innovative strategy to carve out a niche, we await further news of market acceptance for Yes’ service and price plans. Hence, we maintain our FY12FFY14F loss assumptions of RM100mil-RM250mil for thegroup’s Yes division. Recall that the group indicated that Yes will need a subscriber base of 1 million (vs. over 300,000 currently) to break even.

• We also remain concerned about the group’s proposedinvestment in a 30% stake in an Estonian state oil company-led oil shale project in Jordan comprising an oil plant with a capacity of 38,000 barrels/day and a 900 Mega Watt oil-shale fired power plant, which could cost US$5bil.

• The stock currently trades at a fair CY12F PE of 12x – within its three-year diluted PE band of 10x-16x.

Source: Amesecurities