CIMB Research Report, 19 October 2007
YTL Power International
Target Price: RM3.44
An undiscovered gem in Wessex Water
? Southern Water sets 1.44x EV/RAB benchmark. It was reported last week that a group of infrastructure funds led by JP Morgan has agreed to buy 100% of Southern Water from Royal Bank of Scotland for an enterprise value of ?4.2bn, valuing the UK water company at a record EV/RAB multiple of 1.44x.
? Wessex Water potential not imputed in YTL Power’s share price. Valuing Wessex Water at the 1.44x historical EV/RAB valuation for Southern Water, we get a value of RM10.7bn for Wessex alone. This is equivalent to RM2.01 per YTL Power share and 86% of YTL Power’s market cap of RM12.4bn, which implies that the market is according a value of only RM1.7bn to its other assets, which include power plants in Malaysia and Indonesia and a 33.5% stake in ElectraNet.
? No change to earnings forecasts. Our FY08-10 earnings projections are maintained. To recap, we are forecasting modest annual net profit 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.
? Reiterate OUTPERFORM but with a higher target price. Our target price is raised from RM3.30 to RM3.44, as we incorporate a forward RAB estimate for Wessex Water, in line with the rollover of our valuation horizon to end-08. YTL Power remains on our OUTPERFORM list with key re-rating catalysts being: i) earnings-enhancing acquisitions, ii) further re-rating of UK water stocks, iii) opportunities from the local water industry and iv) treasury share distributions.