Saturday, November 16, 2013

YTL Power : Not out of the game yet (CIMB)

YTL Power International
Current RM1.90
Target RM2.55
Not out of the game yet

We were positively surprised that YTL Power emerged as the lowest bidder for the 2,000MW coal-fired power plant under Project 3B ahead of favourites Tenaga and 1MDB.

We maintain our Outperform call on YTL Power, with an unchanged SOP-based target price of RM2.55. We believe the news that YTL Power submitted the lowest bid for Project 3B will put the company on investors’ radar again. The re-rating catalyst will be the announcement of YTL Power securing the tender for Project 3B that is expected by early-2014.


What Happened
The Edge Weekly published an article at the weekend on YTL Group's return to the regulated assets space. The group bagged a major government contract (the 1BestariNet project) last year and took the lead in another (YTL Power outbid Tenaga Nasional and 1MDB in the tender to build and operate a 2,000MW coal-fired plant under Project 3B). The tender will only be awarded in early-2014 but industry sources said that YTL Power's bid of 25.12 sen per kilowatt hour (kWh) was the lowest compared to 1MDB's 25.33 sen per kWh and Tenaga's 28.07 sen per kWh. However, the bids still have to undergo technical evaluation and the industry sources noted that YTL Power's bid was only marginally lower than 1MDB's.

 What We Think
We believe that the news is positive for YTL Power, assuming that it does win the bid. This would provide YTL Power with more consistent cashflow in 2018 onwards and supplement its current stable businesses. Although the dividends could be called into question given the high capex required for the project, we believe YTL Power could ring fence the construction cost due to the strong and stable cashflow of the power plant.

What You Should Do
Stay invested in YTL Power as clinching the bid will be a re-rating catalyst for the stock. We believe that the returns from the power plant will provide stable cashflow and translate into higher dividends in the longer term. Furthermore, the return of YTL Power to the IPP scene implies that there may be more major contract wins in the future.

YTL back in the hunt
The Edge Weekly published an article at the weekend on YTL Group's return to the regulated assets space, as the group bagged a major government contract (the 1BestariNet project) last year and took the lead in another (YTL Power outbid Tenaga Nasional and 1MDB in the tender to build and operate a 2,000MW coal-fired plant under Project 3B). The article also highlighted other government projects that the group is likely to be a strong contender for, including the high speed rail (HSR) project between Kuala Lumpur and Singapore and the redevelopment of the customs, immigration and quarantine building in Johor Bharu.

Lowest bid for 2,000MW track 3B
YTL Power surprised the industry with the news that it outbid Tenaga and 1MDB for the tender to build and operate a 2,000MW coal-fired power plant under Project 3B two weeks ago. The tender will only be awarded in early-2014 but industry sources said that YTL Power's bid of 25.12 sen per kWh was the lowest compared to 1MDB's 25.33 sen per kWh and Tenaga's 28.07 sen per kWh. However, the bids still have to undergo technical evaluation and the industry sources noted that YTL Power's bid was only marginally lower than 1MDB's. YTL Power's partner for the 2,000MW power plant is Johor royalty-linked SIPP Energy Sdn Bhd, with major shareholder Datuk Daing A Malek Daing A Rahaman. Datuk Daing is a member of the Council of the Royal Court Advisers to the Sultan of Johor and shares business interests with the Tunku Mahkota of Johor, Tunku Ismail Idris Sultan Ibrahim. To build the power plant, YTL Power has brought on board the consortium of POSCO Engineering and Construction and Mitsubishi Corp as the engineering, procurement and construction (EPC) contractor for the power plant.

Dividends could be further delayed?
Although winning the bid could be a catalyst for YTL Power, the question of dividends arises as it would need to conserve more cash as capital for the project. Using RM6-7m/MW as benchmark for the construction cost, we estimate the total cost of the 2,000MW coal-fired plant could be c.RM12-14bn. YTL Power currently has RM9.6bn in cash and RM22.8bn in total debt, implying a net debt position of RM13.2bn, and a net gearing of 1.3x. The article noted that assuming YTL Power does win the bid, there is a possibility that investors would not see dividends in the near to medium term as its cashflows would not be able to sustain the dividend payments, despite the fact that its capex for the 4G investment is now at the tail end as YTL Power has spent almost all of the RM3bn allocated for the project. Furthermore, with the expiry of its PPA in 2015, its operating cashflow would be slightly weaker in the coming years. However, our take is that YTL Power could undertake project financing for the construction cost i.e. ring fence it to avoid any strain on YTL Power's balance sheet given the strong and stable cashflows expected from the power plant. As such, it seems unlikely that the company would sacrifice so much in dividends for such a long period of time. Indeed, the article did quote YTL Power's executive director, Datuk Yeoh Seok Hong as saying investors would be rewarded going forward, with an emphasis on YTL Corp wanting to see dividends from YTL Power as well. We believe this is a strong indication that risk of further lack of dividends is low moving forward.

Share buybacks lifted company's share price
The group has spent RM842.1m buying back 500.9m of its own shares this year which have lifted the company's share price by 18% since end-Aug to RM1.90 currently. According Datuk Yeoh, the share buybacks and subsequent price appreciation have increased value for long-term shareholders due to the share price appreciation. This is apparent in YTL Corp's case, as its stake in YTL Power has increased to 53%, from 51%, due to the share buybacks and subsequent cancellation of 250 YTL Power shares
Broadband business expected to breakeven in FY14
As for the broadband business, YTL Power expects it to break even in FY14. Management highlighted that its subscriber base is approaching the 500,000 mark. The group's mobile broadband segment subscriber growth will be supported by its 1BestariNet project, which has approximately 10m users that include parents, teachers and students. YTL Power has the potential to convert the 1BestariNet users into subscribers of its mobile broadband services.



Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date:11/11/13

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