CLSA Asia-Pacific Markets,?14 November 2007
Buy : RM2.40
Target Price: RM3.24
MP Malaysia: YTL Power - (YTL powers on)
We believe that the market is mis-pricing the value of Wessex Water in
YTL Power (YTLP). We estimate Wessex is worth RM2.33/share, contributing 72% of our RNAV-based target price of RM3.24 for the group. Investors buying YTL Power at the current share price just reflects the value of Wessex and they are getting the rest of its independent power producer (IPP) operations for free. We upgrade the stock to BUY from O-PF with a potential upside of 35%.
A great water story …
Wessex Water is the key earnings driver for YTLP. Its revenues increased by 8% in 2007 while net profits shot up by 37% YoY. Recently announced takeover of Southern Water at a huge 44% premium to its Regulated Asset Base (RAB) by JPMorgan Chase has set a new benchmark to value Wessex. We used the same basis to value Wessex in our RNAV estimate for YTLP, which is conservative given that Wessex was recognised as the most efficient water operator in England and Wales by Ofwat, the industry’s watchdog. Efficiency and strong management has been the pivot for YTLP’s solid financial performance.
Solid cash flows from IPPs
YTLP has two IPPs in Malaysia and another power plant in Java, Indonesia. They provide a steady flow of income to the company. Returns are mostly regulated and governed by Power Purchase Agreements (PPAs). Growth opportunities come from potential acquisitions and new projects. Together, they contribute 25% of our RNAV estimate.
Cash is king
YTLP boasts of a strong balance sheet with RM6bn in gross cash as at 30 June 2007. Cash is king in the current global credit tightening situation. It provides the company with a huge war chest to pursue potential water and IPP projects, while enabling the company to maintain a high dividend payout of 54% (excluding stock dividends) over the past few years and aggressive share buyback program.
Valuation reveals upside potential
Current PE of 13x for YTLP is attractive compared to UK water companies that are trading between 14x and 18x FY3/08 (consensus). Sum of parts analysis reveals a potential upside of 35% to our target price of RM3.24. We upgrade our call to BUY from O-PF.