Asia Pacific Equity Research, 25 May 2007
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 greenfield projects in Indonesia. Wessex Water also stands to benefit from lucrative O&M fees for its services in YTL Corp's recent M$1bn river cleaning project.