Completed Acquisition of Tuaspring

YTL Power (YTLP) announced that it has completed the acquisition of Tuaspring Pte Ltd for S$270mil cash (RM864mil). The original purchase consideration was S$331.5mil comprising S$230mil cash and S$101.5mil issuance of shares and loan notes in YTL Utilities, which is YTLP Seraya's holding company. The acquisition price has been lowered to account for two years of depreciation. The proposed acquisition was announced back in March 2020.

This is a masterstroke again by YTL Power for a number of reasons:

• The acquisition price of S$270mil valued the power plant at S$682/kW (S$270mil / 396MW), which is almost 30% cheaper than the cost of a new build combined-cycle power plant

• The acquisition was announced in Mar 2020 at the start of the Covid-19 pandemic, and when the original owner Hyflux was in financial troubles. The electricity market in Singapore then was still slightly in over-supply situation due to collapse of demand during pandemic. Again this demonstrates once again the good foresight of YTLPower management of buying up quality assets at distressed sale.

• The timing of completion of the acquisition is simply timely to catch on the imminent start of the margin expansion cycle as Singapore electricity market enters tight supply due to years of under-investments there and economy recovery from pandemic

I estimate that this investment in Tuaspring will be recouped within 3 years as Tuaspring may generate gross profits of SGD73mil to SGD120mil a year from FY2023 onwards.

Explosive Earnings Growth from Singapore

Due to years of under-investment and lack of new generation capacity, Singapore electricity market is experiencing tight supply and hence high electricity prices. Generating companies in Singapore are benefiting from the high electricity prices though the gas costs for generating electrical power also go up, as the quantum of electricity price increase has outpaced the gas cost increase.

The chart below shows the average monthly Uniform Singapore Energy Price (USEP) from 2010 to 2021. As can be seen, USEP was high in 2010- 2012 due to tight supply then. YTLPower completed the acquisition of PowerSeraya in 2009, which was timely when generating margin was good, hence enabling YTLPower to recoup its investments in PowerSeraya fast. USEP started dropping since 2013 as Singapore government brought in LNG and supply became more than enough. The long lull period from 2013 to 2021 with low electricity prices and over-supply condition has deterred new investments into the power sector. Demand recovery after pandemic has caused the electricity market there to become very tight. A slight tip of demand-supply balance can cause wide swings in USEP.

The table below shows the monthly average USEP in 2021 and Jan-Mar 2022. USEP jumped almost 5 folds in Oct 2021 as Singapore re-opened economy with higher electricity demand and high crude oil prices. USEP has since cooled down slightly in early 2022 but remain at elevated levels, even higher than the 2011-2012 levels.

When USEP jumps up so much, the expansion in gross profit margin will be exponential. For illustration, imagine that when USEP was at SGD100/MWh level in 1H2021, power companies in Singapore might earn a profit margin of just SGD10/MWh (a 10% margin). When gas costs jumped 200% say from SGD90/MWh in 1H2021 to SGD270/MWh in 1Q 2022, the profit margin might jump from SGD10/MWh by easily 3 folds to SGD30/MWh (still maintaining a 10% margin).

PowerSeraya Earnings to improve many folds from FY2023

I had earlier projected that PowerSeraya would register a profit before tax of SGD171-371 million or RM530-1,150 million a year. As reported in Q3FY2022, PowerSeraya recorded a profit before tax of RM135 million, annualized to RM540 million which is at the lower end of my earlier estimated range.

Now with the completion of Tuaspring acquisition, PowerSeraya effective generating capacity will increase by almost 20% or 396MW. Hence projected earnings for PowerSeraya may jump up by 20% from FY2023:

            Gross profit:    SGD360mil to SGD600mil

            EBITDA:           SGD310mil to SGD550mil        (after deducting operating costs SGD50mil)

            Profit before tax:          SGD231mil to SGD471mil                 

(after adding SGD22mil PetroSeraya earnings, deduct interest expenses SGD26mil and depreciation charges of SGD75mil)

Higher Dividends from FY2023

The cash proceeds from the disposal of Electranet has come in handy for the expansion of businesses:

• Development of Green Data Centre Park in Johor
• Starting up of the new digital bank business
• Acquisition of Tuaspring
• Potential new power project to export power to Singapore
• Pushing the new 5G telco business to gain market share

YTLPower will not need to get additional borrowings to fund the above new business ventures, and existing operating cashflows can sustain an annual dividend of 5.0 sen per share. With improving cash flows from PowerSeraya, we can definitely expect higher dividends from FY2023 onwards. I am confident that YTL Power will be a multi-bagger in next 2-3 years.

For more background information, please refer to my first article on YTL Power:

https://klse.i3investor.com/web/blog/detail/dragon328/2022-04-22-story-h1621549755-YTL_Power_is_potentially_a_10x_Bagger