JP Morgan: YTL Power- Despite flat 3Q07 earnings, cash build-up is strong. Raising DPS estimates PT – ‘Overweight’, target price RM2.90
Price Target: M$2.90
Despite flat 3Q07 earnings, cash build-up is strong.
Raising DPS estimates
3Q07 in line. Stripping out the M$89MM capital gain from the sale of YTL Cement ICULs to YTL Corp (please see YTL 3Q07 results note for details), net profit came in flat Y/Y for the quarter, whereas for the 9 months recurring net profit has grown 8% ytd to M$660MM. Although
this accounts for 70% of our full year forecasts, we are confident 4Q07 will make up for the stagnant growth in 3Q07. The flat growth was a result of what we believe was scheduled O&M downtime for the Malaysian plants. Revenues and profitability are traditionally better q-o-q
in 4Q due to seasonal demand at Wessex Water during the summer.
Cashflows exceptionally strong, second tax-free interim div given. FCF has hit M$823MM for the 9 months vs M$312MM during the same period last year. Cash on the balance sheet is now almost M$7B. It is not a surprise therefore that management has declared a second interim tax-free dividend of 3.5 sen per share. The tax-free feature comes from the cash payout from Wessex Water, where dividends received from the concession is not subject to double taxation. We believe tax-free interim dividends every quarter will be a recurring feature by YTLP going
forward. As a result we are raising our net DPS forecast from 7 sen per share to 10 sen per share for FY07E, FY08E and FY09E. Despite the recent share price appreciation, the net dividend yield stays at 4%.
Maintain RNAV-based PT of M$2.90. Our PT is based on the RAB value of Wessex Water, the DCF of the Malaysian IPPs and the book value of associate companies and investments. We believe an M&A re-rating is imminent as management starts to maximize the potential of its
balance sheet as it looks towards increasing its stake in PT Jawa, rolling out brownfield and