YTL Power - Lower contributions from power and Seraya Hold

- We maintain HOLD call on YTL Power International Bhd (YTLP), but with a lower fair value of RM1.68/share (vs. an earlier RM2.05/share) based on an unchanged 15% discount to a revised sum-of-parts (SOP) value of RM1.98/share (previously at RM2.42/share). 

- Our lower SOP (See Table 3) stems from:- 1) lower DCF of expiring cashflows from the Paka & Pasir Gudang plants, and 2) lower fair value for Wessex Water from the removal of a 20% premium on the average regulated capital values of the UK’s listed water and sewerage companies, which have significantly appreciated over the past three months.

- We have lowered FY12F-FY14F net profits by 6% due to lower earnings contributions from the group’s power division as YTLP’s 9MFY12 net profit of RM823mil (-5% YoY) came in below expectations, accounting for 71% of our FY12F earnings of RM1,168mil and 65% of street estimate’s RM1,267mil. 

- As expected, YTLP declared a third interim single-tier dividend of 0.9 sen/share, which is equal to 2QFY11 but halved YoY. The group’s 9MFY12 dividend was halved YoY to 3.8 sen/share, This is equal to our dividend payout assumption of 50%. 

- Sequentially, YTLP’s 3QFY12 net profit declined 16% to RM263mil due to:- (1) higher depreciation charges for the power division; and (2) higher maintenance costs for Power Seraya. But this was surprisingly partly offset by a lower WiMax loss of RM17mil vs. RM76mil in 4QFY11.

- We are uncertain if the lower losses for WiMax can  be maintained given the group’s rising capex for this division. Hence, we maintain for now our FY12F-FY14F loss assumptions of RM100mil-RM250mil for the group’s Yes division. Recall that the group has indicated that Yes will need a subscriber base of 1 million (vs. over 400,000 currently) to break even.

- Overseas operations accounted for an estimated 93% of the group’s 9MFY12 pre-tax profit, for which the Malaysian-based gas-fired power generation plants and 35%-owned PT Jawa contributed 19%, UK’s Wessex Water 34% and Singapore’s Power Seraya 47% (See Table 2). 

- We remain concerned about:- 1) the potential reduction in capacity charge in exchange for the extension of the power purchase agreements for the group’s 1,212MW gasfired power plants in Paka and Pasir Gudang, which expire in September 2015, 2) further losses in the Yes WiMax division, and 3) the group’s proposed investment in a 30% stake in an Estonian state oil company-led oil shale project in Jordan, which could cost up to US$5bil. 

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

Source: AmeSecurities