Asia Pacific Equity Research, 10 October 2006
Valuation trigger emerges as UK water concessions rerate - ALERT
? UK water stocks are re-rating on M&A, which has brought the premium on the 2006 Regulated Asset Base (RAB) of? UK water concessions to an average of 25.8%. Our YTLP RNAV of M$2.38 per share assumes no premium on the RAB of its Wessex concession. If we apply the 25.8% sector premium, the RNAV of YTLP would increase by 27% to M$3.02 per share and Wessex would represent 54% of YTLP’s RNAV.
? YTLP valuations are not reflecting the UK water sector re-rating, mainly due to the current overhang of PPA re-negotiations taking place at home, in our view. However we believe at some point the significance of YTLP’s exposure to the UK water sector should take precedence over the issues in the domestic IPPs. To put things into perspective, YTLP traditionally trades near its RNAV due to its strong balance sheet and M&A track record. Assuming the current share price level represents YTLP’s future RNAV, it would imply that the DCF of the Malaysian IPP business will contract by 40% in the outcome of the PPA re-negotiations. Although we do acknowledge the risk of re-negotiations coming out NPV negative, a 40% haircut is highly unlikely in our view. Taking this further, if we apply the 25.8% UK sector premium to RAB, the DCF of the Malaysian IPP business would have to fall by 83% to bring the RNAV down to current levels.
? We therefore believe YTLP offers a compelling value play. With foreign ownership only at 4%, the current anomaly against UK water valuations seems overlooked.