CIMB Research: The News - Outperform; target price: RM2.65

CIMB Research Report, October 19, 2009

By Soh May Yee

YTL Power International
Target Price: RM2.65
OUTPERFORM

The news

The Edge Weekly’s cover story shined the spotlight on the YTL Group. For us, the key surprises relating to YTL Power were i) the delay in its WiMAX rollout from mid-2010 to end-2010, ii) the identity of its WiMAX partner, iii) Wessex Water’s proposal for the least amount of tariff increase, and iv) the group’s RM16bn valuation for Wessex Water. While we are slightly disappointed by the holdup in its WiMAX rollout, the potential earnings impact is difficult to quantify. We stick to our 1.5x EV/RAB valuation for Wessex Water as we continue to believe that its superior efficiency warrants a premium over its peers. We also retain our FY10-12 earnings estimates and end-2010 target price of RM2.65, which remains pegged to a 10% discount to its SOP value. YTL Power remains an OUTPERFORM, with potential re-rating catalysts being i) better PowerSeraya contributions, ii) more clarity on its WiMAX venture and iii) potential M&A ventures.

Highlights

In the article, Group MD Tan Sri Francis Yeoh focused on the group’s i) ongoing search for assets, and ii) the upcoming WiMAX rollout. Interestingly, excitement within the group appeared to be centred on its REIT and utility businesses. For YTL Power, the highlights are summarised below

• On the M&A front, Tan Sri Francis is hopeful of another chance of getting his hands on some assets that are still undervalued and reap the benefits at the tail-end of the recession, before a full recovery lifts all asset classes back to the peak prices. Timing-wise, however, he thinks that the group will still have to wait for the hedge funds to be forced by redemptions or for banks to take a haircut before good deals can come through.

• Despite the group’s international footprint, the focus now will be in Asia as Tan Sri sees Asia developing from an emerging market into a global economic powerhouse. According to Tan Sri, among the more prominent businesses are power generation, water treatment, construction, hotel operations and the rollout of Internet facilities. For the group, he still sees opportunities in the water business within the region.

• Although the group is one of the four 2.3 GHz WiMAX licensees which have yet to commercially launch their services, the entrepreneur says good progress has been made so far. By Dec 2010, the whole country will have access to YTL’s wireless broadband services. YTL Communications will spend about RM2.5bn on the rollout. The article disclosed that YTL Power’s 40% partner, Bara Aktif Sdn Bhd, is jointly controlled by two individuals, Datuk Mohamed Zainal Abidin Abdul Kadir and Raja Wahid Raja Kamaral Zaman. The group targets to have 14m subscribers and has located 2,000 sites for its WIMAX network. It has also tied up with Cisco Services Malaysia and Samsung Electronics Co which will assist in the rollout. The group reiterated its strategy of 100% coverage from day one of its commercial launch.

• On YTL Power’s key earnings contributor, Wessex Water, Tan Sri Francis said the asset is now worth about £2.2bn. But given the 30% premium over RAB, the asset is valued at about £2.8bn (RM16bn). Also, the water company’s ability to ask for the least amount of tariff increase from the regulators is due to its good management.