YTL Power International - Powering down? HOLD

- We maintain HOLD on YTL Power International (YTLP), with a lower fair value of RM1.62/share (vs. an earlier RM1.68/share) based on a 15% discount to a revised sum-of-parts value of RM1.92/share (RM1.98/share previously). 

- YTLP’s lower fair value stems from a 20%-30% cut in FY13FFY15F power generation EBIT, which leads to a 3%-6% decrease in earnings. 

- The group’s 1QFY13 net profit (flat YoY) of RM253mil was below expectations, accounting for 19% above our earlier estimate of RM1,330mil and 20% of street estimate’s RM1,243mil. This was due to lower-than-expected contributions from the Paka & Pasir Gudang power plants, likely due to plant maintenance and accelerated depreciation as their power purchase agreements expire in September 2015.

- Sequentially, YTLP’s 1QFY13 pre-tax profit declined 38% largely due to:- (1) absence of lower effective tax rate for Wessex Water, which enjoyed a 2ppt-reduction in UK corporate tax rate in 4QFY12; and (2) investment holding costs of RM25mil largely due to absence of gain on financial assets. As expected, YTLP declared a first interim single-tier dividend of 0.94 sen/share.

- Overseas operations accounted for an estimated 87% of the group’s 1QFY13 pre-tax profit, for which the Malaysian-based gas-fired power generation plants contributed 13%,  UK’s Wessex Water 36% and Singapore’s Power Seraya 51% (See Table 2). 

- 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. 

- We remain concerned about:- 1)The need to find a replacement for the two power plants over the next three years as our preliminary estimates indicate that the cessation of their operations could shave group earnings by up to 15% in FY16F, 2) Lack of domestic catalysts for the stock as the heightened competitive landscape dims the group’s prospects in securing fresh concessions in Malaysia, 3) Further losses in the Yes WiMax division as Yes needs a breakeven subscriber base of 1 million vs. over 400,000 currently, 4) Uncertainties in new investments such as the group’s investment in a 30% stake in a US$5bil Estonian state oil company-led oil shale project in Jordan. 

- The stock currently trades at a fair FY13F PE of 10x – within its three-year diluted PE band of 10x-16x. But current gross dividend yield of 3% appears mild for a stock with a recurring earnings profile. Upside risks to the stock stem from the possibility of holding company YTL Corp undertaking a privatisation exercise for YTLP and 1MDB making a bid for the Paka & Pasir Gudang power plants.  

Source: AmeSecurities