YTL Power — a ‘must have’ defensive stock

YTL Power International Bhd
(July 30, RM2.26)
Initiating coverage with a buy call at RM2.28 and target price of RM2.45: YTLPI buys assets at attractive valuations by capitalising on its large cash hoard during financial downturns in various economies. Wessex was acquired for an enterprise value (EV) of £1.24 billion (RM6.15 billion) or a 7% discount to its regulatory capital value (RCV) against a current 38% to 45% premium based on recent UK water company M&A activities. Seraya was acquired at an EV of S$3.8 billion (RM8.9 billion) or 1.2 times EV/MW against the recent sale of Singaporean power asset average of 1.3 times.

We also think greenfield projects are likelier targets, especially in terms of duplicating its power and water business models. Potential developing nations (for example, China and the Middle East) may offer better growth opportunities than developed nations, given better economic growth prospects and first-movers advantages. The group is also embarking on its maiden WiMAX venture which could offer surprising earnings upside upon successful rollout.

We see no issue with raising new debt or equity to finance the WIMAX capital expenditure given the company’s credible track record. New acquisitions are typically financed on a 70:30 debt-equity funding. The company has strong debt servicing abilities with 2.2 to 2.4 times interest cover ratio and a RM6.6 billion cash pile. Additionally, major assets are “ring fenced” regulated concessions (for example, Wessex, Electranet) or on limited recourse loans (Seraya), allowing YTLPI to raise fresh financing for new ventures.

Growth will mainly be driven by Seraya’s full-year contributions and recovering economic conditions in Singapore. It is timely, given that the weakened UK pound will subdue growth from Wessex. Future WiMAX contributions could surprise on the upside; WiMAX contributions have not been factored into estimates.

A must-have defensive stock with FY2010/11E 7.7% to 7.8% gross yields, with a potential higher yield of 8.4% if share dividends are proposed. It is timely to accumulate YTLPI as we expect the market to be range bound by global and local economic uncertainties. The WiMAX venture should not dampen the dividend given YTLPI’s strong balance sheet and vendor financing. While most of YTLPI’s businesses are regulated, steady cashflow is assured. — Kenanga Investment Bank Bhd Research

This article appeared in The Edge Financial Daily, August 2, 2010.