20 June 2005
Price Target: M$2.30
• Indonesia yielding strong 20% plus returns: With little competition for new projects and higher equity returns, Indonesia remains a core expansion focus for YTL Power (YTL). Equity returns from its 35%-owned associate Jawa Power appear to be over 20%, and its four to five-year payback period appears to be on track. High power demand and shortage of power generation plant capacity means the Indonesian government welcomes foreign investors.
• We expect 6.5% FCF yield in FY06E to grow to 12.3% in FY10E: The reasons are improved profitability at the company’s UK Wessex Water (from a tariff hike), dividend stream from its associates (ElectraNet and Jawa Power) and declining interest expense as debt is repaid. Net gearing is expected to drop to 1.3x by FY07E (from 1.7x now), providing scope for YTL Power to step up dividends, and/or meet future funding requirements for acquisitions.
• The stock has achieved 20% total returns YTD: This has been achieved by share buy-backs, dividends (and treasury stock), and earnings growth from Jawa Power. We believe further outperformance will come from either an increase in dividends and/or a value-enhancing acquisition. Over half of the current M$9.9 billion market cap is in cash. The 11x FY06E P/E is at the low end of its historical range and is below the Malaysian market average of 13x. Our new 12-month target price of M$2.30/share (from the previous M$2.20/share) is derived from 13x FY06E P/E (before dilution). We maintain our Overweight rating.