CIMB Research Report, September 12, 2007
Target Price: RM3.30
Global utility play
Utilities arm of YTL Corp. YTL Power is the global utilities arm of YTL Corporation. It owns power plants in Malaysia and Indonesia, water concession assets in the UK under Wessex Water and a 33.5% stake in Electranet, which owns and operates a power transmission network in Australia. Overseas assets contributed some 79% of FY07 EBIT including associates.
Modest earnings prospects but … We project modest annual earnings growth of 9-11% for FY09-10, fuelled mainly by higher efficiency for its power plants in Indonesia and above-average price hikes for Wessex Water. However, for FY08, the bottomline is set to contract by 15% in the absence of deferred tax credits.
… ample M&A-led opportunities. Nevertheless, there is room for YTL Power to expand its earnings base by i) leveraging its cash hoard to seize lucrative M&A opportunities, ii) bidding for Singapore’s power assets and iii) utilising its Wessex expertise to tap into the local water industry.
Starting coverage with OUTPERFORM call. Given the 38% upside to our SOP-based target price of RM3.30, we initiate coverage on YTL Power with an OUTPERFORM call. Key re-rating catalysts include i) earnings-enhancing acquisitions, ii) further re-rating of UK water stocks, iii) opportunities in the local water industry and iv) treasury share distributions. Investors with a higher risk appetite could consider its 2000/2010 warrants (RM1.00, YTLPW, exercise price RM1.39, expiry 8 Jan 2010) which are currently in the money.