YTLP announced the acquisition of 396MW CCGT Tuaspring for SGD331.45m (RM1,004.3m). We are relatively positive on the acquisition, as YTLP will be able to improve its Singapore power asset quality with potential synergy and business consolidation for larger market share and cost savings over the longer term. However, we still maintain our HOLD recommendation with lower TP: RM0.65 (from RM0.75) based on higher 30% discount (from 20%) to unchanged SOP: RM0.94, as we expect higher earnings risk due to the outbreak of Covid-19 in affecting global economy.

NEWSBREAK

YTLP has announced the acquisition of Tuaspring Power Generation Assets (from Maybank through receivership) for a total consideration of SGD331.45m (RM1,004.3m), which will be satisfied with SGD230m (RM696.9m) in cash (to be financed through borrowings) and SGD101.45m (RM307.4m) book value of 7.54% Equity Interest (comprising of new ordinary shares and loan notes) of the enlarged share base in YTL Utilities, the immediate holding co of YTL Power Seraya. The Assets comprise of a land lease for the plant site for 20 years remaining term and the 396MW CCGT power station and stocks and associated assets. The acquisition is expected to complete in 2QCY2020.

Put Option. YTLP has also granted Maybank a put option (exercisable within 3 years) to require YTLP to purchase the 7.54% Equity Interest in YTL Utilities at SGD40m (RM121.2m), as compared to current book value to SGD101.45m (RM307.4m).

HLIB’s VIEW

Positive. The acquisition is in line with YTLP’s long term strategy in expanding its utility business portfolio globally. The group is expected to leverage on its existing Singapore Seraya for synergy and business consolidation, resulting larger market share and cost savings. However, the expected downturn in Singapore economy in 2020 may continue to affect the profitability of Singapore’s power generation sector.

Cheap valuation. The acquisition price of SGD331.45m (RM1bn) without any liability encumbrance for 396MW CCGT in Singapore is relatively cheap as compared to YTLP’s acquisition cost of SGD3.8bn (RM11.4bn based on current exchange rate) or total asset value of RM11.4bn (based on FY19) for 3,100MW licensed capacity, which included 1,540MW CCGT and 1,500MW oil-fired thermal. Nevertheless, the acquisition will increase the group’s net gearing level to 1.72x from current level 1.66x (as at 2QFY2020).

Forecast. Unchanged.

Maintain HOLD, TP: RM0.65. We maintain HOLD recommendation with lower TP: RM0.65 (from RM0.75), based on higher discount rate of 30% (from 20%) to unchanged SOP: RM0.94, following the increased risk to earnings due to the outbreak of Covid-19 in slowing down global economy, especially in UK and Singapore.

Source: Hong Leong Investment Bank Research - 13 Mar 2020