Investment Highlights

• We are downgrading YTL Power (YTLP) to UNDERWEIGHT from HOLD with a lower RNAV-based fair value of RM0.60/share. Due to volatile market conditions and the risk of a slower economic growth, we have applied a discount of 20% to YTLP’s RNAV of RM0.75/share.

• We have not accounted for the Tuaspring power plant in YTLP’s FY21F earnings forecast. The proposed acquisition is expected to be completed in 2Q2020.

• We are neutral on YTLP’s proposed purchase of the Tuaspring power plant via a call and put option agreement. In 9MFY18, Tuaspring (water desalination plant and power plant) recorded an estimated net loss of S$70.6mil and operating loss of S$69.8mil. We do not know how much losses were recorded by the power plant alone.

• We estimate that YTLP’s net gearing would rise to 222.9% in FY21F from 217.4% as the group finances the proposed acquisition of the Tuaspring power plant with borrowings. YTLP is paying cash of S$230mil and issuing shares and loan notes (representing a 7.54% stake) in YTL Utilities worth S$101.45mil to acquire the Tuaspring power plant. YTL Utilities is the holding company of YTL Power Seraya.

• We estimate that YTLP is buying the power plant at an EV of US$1.3mil per MW, which is lower than the replacement cost of about US$1.5mil per MW for a gas plant. Tuaspring is a 396MW combined cycle gas power plant.

• In arriving at our EV/MW of US$1.3mil, we have assumed that the power plant has borrowings of S$420mil. This is based on a debt-to-equity ratio of 80/20. We have assumed that the power plant is half of the cost of S$1.05bil of the entire integrated water desalination and power plant complex.

• At the end of 1Q2019, the Tuaspring power plant’s market share of the electricity generation capacity in Singapore was 2.9%. YTL Power Seraya’s market share was 22.7%. In comparison, YTL Power Seraya’s market share was 28.7% in 2012.

• Competition is stiff in the open electricity market in Singapore as there are more than 10 players. Out of the 10, about six players are in generation and retailing.

Source: AmInvest Research - 13 Mar 2020