ECM Libra, 24 February 2006
Below on higher interest expense
YTL POWER INTERNATIONAL
Current Price RM2.21
Target Price RM2.90
Net Profit vs Consensus (FY06) +8%
2Q06 was 6% below expectations
Results came in below because of higher than expected interest expense which stayed flat y-o-y rather than going down. Despite the ongoing paydown of debt, more borrowings were taken on during the quarter which we believe is related to the acquisition of PT Jawa Finance Ltd on 14 October 2005. We will need to clarify this event which followed 3-months after the acquisition of the 35%-stake in the PT Jawa plant.
Expect a better second half
The first half has been affected by the maintenance shutdown of PT Jawa and the RM582m in extra debt which we believe is related to PT Jawa Finance. With this 2 events out of the way, YTL Power should show the full impact of a 12% increase in tariffs at Wessex and full momentum in the improvement in net debt from strong cashflows which average RM600m a year.
New cycle of acquisitions
With RM4.8bn of encumbered cash on its balance sheet, YTL Power is well positioned to move into another global cycle of utility-related M&A. It is believed to be bidding for a 600MW Greenfield project in Indonesia while watching closely Eon’s US$34bn takeover bid of Endesa and Alinta’s US$6.6bn bid for Australia Gas & Light. Major consolidation of global utility players invariably result in the shedding of unwanted assets following their restructuring, which YTL Power has shown to be good at exploiting i.e. PT Jawa and Wessex.
YTL Power’s sterling share price performance has made its parent YTL Corp’s valuations relatively compelling. Stripping out YTL Power’s value and earnings from its parent, YTL Corp’s cement, property and ERL businesses are trading at 5.5x PER. This multiple is potentially more understated following YTL Corp’s recent 2Q06 results. Stripping out the gains related to the Starhill REIT, earnings saw 17.8% y-o-y growth thanks to a 60% improvement in profits from YTL Cement and the ERL increasing its contribution by 3x to over RM50m a quarter.
Analyst: Lucius Chong