Quality Assets at Good Price - Target: RM2.60 (+20%)

KAF, October 16, 2009

By Mabel Tan

YTL Power International

Target: RM2.60 (+20%)

YTL Power is extracting much more value from its PowerSeraya acquisition than we initially thought. The company continues to grow from strength to strength and we believe that any concerns on Wessex Water or the group’s plans to participate in WiMax have been overblown. We upgrade our recommendation to Buy (from Outperform) and raise fair value to RM2.60 (from RM1.90).

Issues To Consider

- We believe that PowerSeraya will be a strong growth driver for the overall group, making up 57% of the power division’s earnings (overtaking the domestic IPPs) and 27% of total operating profit

- We expect group earnings to expand structurally from RM1-1.1bn in FY07-FY09 to the RM1.3-1.4bn range. Our revised forecasts exceed consensus’ estimates by 17% in FY10 and 8% in FY11.

- There are two issues that YTL Power is currently saddled with, namely (1) Wessex Water – regulatory risk and weakness in the GBP currency and (2) dividends – risk of a cut in payouts if a lot of cash is diverted to an aggressive roll-out of WiMax infrastructure. We show that these risks are largely manageable.

- The stock has been a significant underperformer YTD. Valuations are undemanding at 13.3x FY10 PER and 2.2x P/B.

Actionable Ideas

- Buy YTL Power for its well diversified portfolio of quality assets. It offers a 7% gross yield as well as potential M&A-driven growth.

Key Catalysts

- Strong pick-up in Singaporean economy, PowerSeraya gains market share, strength in the S$ and GBP currencies, positive outcome in Ofwat’s final determination for Wessex Water, consistent earnings delivery, generous dividend distributions.

Key Risks

- Cuts in dividend payments, high capex commitments for WiMax roll-out, weakness in the S$ and GBP currencies, regulatory risks.