Hwang DBS: YTL Power: Poised for acquisition growth - 'Maintain Buy', target price RM3.00

Malaysia Equity Research, January 30, 2008

YTL Power
Buy RM2.53 KLCI: 1,388.50
Price Target: RM3.00

Poised for acquisition growth

Story: YTLP is one of the few companies that has demonstrated a steady yield and commendable growth for regulated assets. Its acquisitions over the last few years including Wessex Water, Jawa Power and Electranet, have resulted in commendable FY05-07 net profit CAGR of 28%.

Point:YTL Power is also well poised for further value accretive acquisitions of regulated assets given its gross cash of RM6b. There is also scope for YTL Power to leverage on Wessex Water's expertise to gain entry into Malaysia's water concessions business.

Relevance:We favour YTLP for its defensive earnings and stable dividend stream. We initiate coverage on YTLP with a Buy recommendation and SOP-derived target price of RM3.00/share. YTLP offers growth potential from new acquisitions and attractive net yield 8.5%, thanks to a combination of cash and share distribution.

Global utility player.YTL Power (YTLP) enjoys good earnings visibility from its regulated asset with a 100% stake in Wessex Water Limited, a water and sewerage operator in the United Kingdom and an indirect 33.5% investment in ElectraNet Pty Ltd, the company which owns and operates the power transmission grid for the state of South Australia. YTLP also holds a 35% stake in PT Jawa Power which owns a 1,220MW coal-fired power plant in East Java, Indonesia. 65% of YTLP's FY07 revenue came from outside Malaysia. Water and sewerage operation from Wessex accounts for 74% of FY07 EBIT, followed by power generation of 19.8% and investment holding of 5.8%.

Poised for growth with new acquisition.There is a tremendous opportunity for YTLP to acquire regulated assets in the region given its gross cash of RM6b. We envisage reduced competition especially from private equity firms, particularly when the subprime crisis is raising required rate of returns. Apart from its expansion in Indonesia, other potential new assets under consideration are new water concessions in Malaysia and Genco's asset in Singapore. YTLP has proposed a RM2.2b bond in Nov 07 to refinance existing debts and to fund potential new acquisition.

Potential unlocking of asset value in Wessex?There is scope for YTLP to unlock value from Wessex Water as a new benchmark on valuation was set in October 2007, valuing Southern Water at EV/RAB of 1.4x. While we understand that YTLP is not planning to sell down its stake in Wessex in the near term, we cannot discount the possibility of the company doing so, if a lucrative offer is presented at a later stage.

Attractive net yield of 8.5%. YTLP declared net dividend of 11.2 sen and 1-for-25 share distribution in 2007. The combined FY07 net dividend yield based on share price of RM2.50 amounts to 21.2 sen or net yield of 8.5%. Given the improving cashflow from its water and power assets, we expect YTLP to maintain net dividend per share of 11.2 sen for FY08-09, with potential share distribution from its share buyback programme.