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YTL Corp: Winds of change?

MIDF Sisma Securities, 13 July 2004

YTL Corporation (RM4.76)
BUY


  • The government is extremely concerned about the quality of water supply and services within the country and has recently set a year-end target to get a sole regulator to beef up the entire sector.

  • The National Water Council decided in 2003 for the Federal Government to take over the management of water from the states and the new commission will oversee to the water supply and other related services. Interestingly, the authorities are keen to emulate the British model of water privatization and regulation, which has worked well in terms of cost and efficiency.

Prospects and Valuation

  • YTL Corp obviously stands to gain should British expertise be sought for the water privatization task ahead. With Wessex in its bag, the conglomerate has much to offer by way of expertise.

  • Water and sewerage have formed part of parcel of group earnings. In the recent 3Q, subsidiary YTL Power saw a 45% jump in water contributions and even then, the management had expressed keen participation in any opportunities on the domestic front.

  • The power subsidiary still has a substantial war chest with a gross cash hoard of RM4.5bn and an annual cash flow of RM700m. The group has recently proposed to take a 35% stake in P.T. Jawa Power in Indonesia for US$139m. The acquisition will allow YTL Power to move into the utility business within ASEAN.

  • On the face of it, the purchase of PT Jawa Power will see an estimated 15% improvement to FY05 net profit (net of interest income loss but before funding costs). However, based on the existing US$1.3bn debt at PT Jawa Power, the EV/MW for its stake appears expensive at US$1.37m. We have not seen the details of the PPA to verify real cost to the group.

  • It is clear that YTL Corp is keen to revive interest in the group and has done some proactive marketing. Management has expressed its intention to increase its dividends payout to ultimately hit a yield of 5% as a gesture of enhancing shareholders value. However, we expect the group’s intentions to further expand abroad to limit its payout.

  • The stock has been one major underperformer. Over the last 6 months, the KLCI has appreciated by 9% while the stock has inched up 3%. Nonetheless, we believe positive developments are in the horizon and would warrant a re-look. Although the core businesses are defensive, any new ventures particularly into the domestic market in the water arena or other power ventures in Singapore and Indonesia will spell winds of change. As such, we are recommending a Trading BUY.

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