YTL Power International - YTL proposes renounceable sale of YTLP warrants Hold

- We maintain HOLD call on YTL Power International Bhd (YTLP), with an unchanged fair value of RM1.68/share based on a 15% discount to a sum-of-parts (SOP) value of RM1.98/share. 

- YTL Corporation, which has an effective equity stake of 52% in YTLP, has proposed a renounceable offer of sale of YTLP’s existing warrants 2008/2018 on a basis of 1 warrant at a price of RM0.20/each for 15 existing YTL shares. 

- The rationale is to reward YTL’s shareholders by offering a discount of 58% to the closing price of RM0.475/warrant, or potential gain of RM0.27/warrant. For YTL’s shareholders, this translates to a potential profit of 2 sen if they opt to subscribe to the warrants.

- This offer for sale involves 682mil-738mil warrants (based on the minimum and maximum scenario), which account for 73%-79% of the total 934mil YTLP warrants held  by YTL. 

- Currently, YTL holds a 79% share in the 1,177mil total outstanding YTLP warrants. But the offer for sale will result in the share falling to 16%-21%. 

- We are neutral on this development as YTLP will not directly benefit from the proceeds of warrant sale. Hence, we maintain FY12F-FY14F net profits. 

- As the number of existing warrants is unchanged, we likewise maintain YTLP’s fair value, which is based on the group’s diluted share base assuming full exercise of the warrants.

- 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 gas-fired power plants in Paka and Pasir Gudang, which expire in September 2015,  2)Further losses in the Yes WiMax division given the group’s rising capex for this division. Hence, we maintain FY12F-FY14F loss assumptions of RM100milRM250mil for the group’s Yes division pending greater clarity on the results of the 1Bestarinet programme. 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 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 FY13F PE of 10x – within its three-year diluted PE band of 10x-16x.  

Source: AmeSecurities