ECM Libra, 29 April 2005
YTL Power International: Building war chest, RNAV intact
Current price: MYR1.99
Target price: MYR2.42
- YTLPI issued 5 year USD250m zero coupon EB at par
- FD EPS diluted by 6.4%-7.3%
- RNAV diluted marginally; maintain Buy with revised RNAV TP of RM2.42
Salient terms of the Exchangeable Bonds (EB)
Amount raised : USD250m
Maturity date : 9 May 2010
Issue price : At par
Coupon rate : Zero
Exchangeable price : RM2.277, representing 15% premium over RM1.98 reference share price
Exchangeable period : From 20 June 2005
Final redemption price : 118.22% to give a yield of 3.4%
Rationale : To fund future offshore investments and projects and for the potential repayment of foreign currency borrowings of YTL Power's subsidiaries
Others : (i) Put option for bondholders after 3 years at 110.56%; & (ii) Mandatory exchange or redemption at the option of Issuer or Guarantor after 23 May 2007 (terms and conditions apply)
Net profits decreases marginally by less than 1% over 3 years
The EB will provide YTLPI with additional RM950m (USD250m @ 3.8) of cash for potential acquisitions or potential repayment of foreign currency borrowings. While issued at a zero coupon rate, YTLPI is faced with an implied interest charge of 3.4% as final redemption price is at 118.22%. Under the accounting rules, these implied interest charges would have to be amortised equally over the corresponding 5 years period to a sum estimated at RM34.6m per annum. While these implied interest charges will be partially negated by interest income earned from cash proceeds from EB issue, net-net we estimate that net profits for FY05-FY06 will marginally decrease by less than 1% over each of the next 3 years.
FD EPS suffers but RNAV only marginally diluted
The EB issue essentially dilutes FD EPS of YTLPI as more ordinary shares will be issued upon conversion of these EB. At the exchange price of RM2.277, we estimate that YTLPI will need to issue additional 417m of YTLPI if all EB were to be converted. This effectively dilutes YTLPI’s FD EPS by 6.4%-7.3% for FY05-07.
On the other hand, we estimate that RNAV of YTLPI will only be marginally affected by the EB issue. As a result, RNAV will be revised downwards by 2sens to RM2.42 per share.
Investors should not be overly concerned with dilution
We are not too concerned with the dilution in earnings post issuance of this EB. While dilution may at first glance make YTLPI look fairly valued at current PERf05 of 17x, in essence this is merely on paper. Stripping away the dilutive effects of warrants and EB, YTLPI is only trading at an attractive basic EPS of RM0.15 or PERf05 of 13.4x.
While warrants are currently converted by investors seeking to arbitrage from the recent price run-up, we do not think there will be an exodus of conversion in the near future as both the warrants and EB will only expire in 2010. And over time, we believe the dilutive effect will taper off due to organic growth and future acquisitions as evident from YTLPI’s track record. This is further supported by YTLPI’s ongoing share buyback programme.
Despite unsuccessful InterGen bid, outlook remains bright
On a recent development, YTLPI was unsuccessful in its bid to acquire InterGen. Nevertheless we are not too concerned as the company is constantly on the look out for assets that will generate good returns for shareholders. Key to YTLPI’s strategy is always to ensure value-for-money buy and apply lessons learnt from failed bids on subsequent bids. To recap, we have not included potential earnings from acquisitions into our earnings forecast. Hence, we are maintaining our earnings forecast.
Valuation and recommendation
Despite FD EPS dilution, we are maintaining our Buy recommendation on YTLPI. Our target price has been revised downwards by 2 sens to RM2.42; pegged to YTLPI’s revised RNAV. We continue to favour YTLPI because of:
(i) sum-of-parts valuation at RM2.42 per share,(iv) CAGR of 13% on revised FD EPS,
(ii) share buyback programme which will provide strong price support,
(iii) attractive dividend yield of 5.2%-6.8% for FY05-07 which will also provide limited downside,
(v) proven global utility player with strong management that is worthy of a premium valuation, and
(vi) potential M&A play.
Ong Chee Ting
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In the email broadcast to YTL Community members on 29th April, CLSA was mistakenly added into the brief description instead of the proper research house, ECM Libra. We apologise to all parties for any misunderstanding caused by this error.
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