A potentially cheaper entry to its parent. Parent YTL Corp has publicly stated its intention to eventually privatise its 51.4%-subsidiary YTL Power (YTLP). We believe a share swap is the most likely outcome, hence minority shareholders might not necessarily realise the full value of YTLP. Nevertheless, YTL Corp could raise dividends post privatisation, and that could in turn trigger a re-rating. We retain YTL Power as a BUY but on a lower MYR1.80 SOP-based target price.
A share swap makes sense for YTL Corp. The implied value of YTL Corp’s unlisted stub is near its peak, while YTLP is trading close to trough multiples. It makes sense for YTL Corp to privatise YTLP via a share swap. With the swap ratio (share price of YTL Corp to that of YTLP) currently close to historical highs, a share swap might not necessarily be in the best interest of YTLP minority shareholders.
Scope for higher dividends post privatisation. Management has reduced interim DPS to just a quarter of the previous run-rate, resulting in a significant de-rating of the stock. YTLP has ample scope to raise dividends, but we believe this would only happen post privatisation. It is plausible that the enlarged YTL Corp would raise dividends and thus rerate, enhancing returns for the original YTLP minority shareholders.
Revising earnings. Post transfer of analyst coverage, we raise our FY13 net profit forecast by 3% and lower FY14 net profit forecast by 7%. The main changes are: 1) higher depreciation for the Malaysian IPP and 2) lower losses for the Wimax business. We also cut our DPS assumption to 3.8sen (from 4.7 sen) to reflect the latest run-rate. This implies a net dividend yield of 2.5% based on current share price.
Maintain BUY; target price reduced to MYR1.80. Our new target price of MYR1.80 (MYR2.20 previously) is based on a 10% discount to our revised RNAV estimate of MYR2.00, in turn derived from a sum-ofparts valuation with each operating entity valued using DCF. Our target price implies a PER of 11.7x and P/B of 1.3x in FY13. Our investment thesis centres on the company eventually being privatised.
Source: Maybank Research - 17 Dec 2012
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