YTL Power - Awaiting decision on PPA extension

-  We maintain HOLD on YTL Power International (YTLP), with an unchanged fair value of RM1.68/share based on a 15% discount to a sum-of-parts value of RM1.98/share. We have fine-tuned FY13F-FY14F earnings, assuming a lower tax rate and introduced FY15F net profit with a 4% growth from the group’s recurring income operations. 

-  YTLP’s FY12 net profit of RM1,363mil (flat YoY) came in above expectations, accounting for 17% above our estimate of RM1,168mil and 9% of street estimate’s RM1,256mil. But this stemmed from 4QFY12’s positive tax charge of RM48mil arising from Wessex Water’s tax credit with a reduction in UK tax rate. At the pre-tax level, FY12 results were only 1% below our forecast. 

-  As expected, YTLP declared a fourth interim single-tier dividend of 0.9 sen/share, which translates into FY12 DPS of 4.7 sen and a payout assumption of 25%. This is equal to our projection. 

-  Sequentially, YTLP’s 4QFY12 pre-tax profit declined 3% to RM516mil due to:- (1) higher depreciation charges for the power division; and (2) higher fuel costs for Power Seraya, and (3) higher loss of RM96mil for WiMax services vs. RM17mil in 3QFY12. 

-  We understand that the group plans to reduce WiMax’s losses (RM310mil in FY12) with its implementation of the iBestarinet project to provide broadband internet connectivity to schools. But given the group’s rising capex for this division, we maintain for now our FY13F-FY15F annual loss assumption of RM150mil for the group’s Yes division. 

-  Overseas operations accounted for an estimated 82% of the group’s FY12 pre-tax profit, for which the Malaysian-based gas-fired power generation plants contributed 18%, UK’s Wessex Water 37% and Singapore’s Power Seraya 45% (See Table 2). 

-  We remain concerned about:- 

1)The potential loss of income if the power purchase agreements for the group’s 1,212MW gas-fired power plants in Paka and Pasir Gudang are not extended from  their expiry on September 2015. This could shave earnings by 10%. 

2)Further losses in the Yes WiMax division given the group’s rising capex. Recall that the group has indicated that Yes will need a subscriber base of 1 million (vs. over 400,000 currently) to break even.

3) Uncertainties in new investments such as the group’s 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 FY13F PE of 10x – within its three-year diluted PE band of 10x-16x.

Source: AmeSecurities