Post management meeting, we maintain BUY with higher TP: RM1.05 (from RM0.75) based on 10% discount to SOP: RM1.16. The disposal of ElectraNet at RM3bn has reflected that the market severely underappreciates the valuation of YTLP’s Wessex Water. The exercise will also improve YTLP’s balance sheet position and allow it to channel resources into new viable business opportunities, likely related data centre, solar farm and digital banking. At the same time, YTLP is also likely to continue its dividend payout in FY22.

We Met With Management Recently With the Following Key Takeaways:

Disposal of ElectraNet. YTLP is expected to complete its disposal exercise for 33.5% stake in ElectraNet for AUD1.03bn (RM3.06bn) to Australian Utilities by mid- 2022. Upon disposal, YTLP will realise gain of RM2.21bn, after acquired the stake for AUD58.5m back in 2000. The implied sales valuation is 1.6x EV/RCAB with RCAB (Regulated and Contracted Asset Base) of AUD3.5bn.

Valuation of Wessex Water. Management clarified the business model of Wessex Water is somewhat similar to ElectraNet, with termed RCV (Regulatory Capital Value) as a replacement to RCAB. Wessex Water’s earnings are protected based on allowable return on approved capital expenditure with inflationary adjustments. Wessex Water reported RCV of GBP3.36bn (RM19.3bn) as at end FY06/21. We have applied 1.2x EV/RCV multiple in our SOP, a more conservative valuation as compare to ElectraNet, as we do not expect the asset to be monetized in the immediate term with a ready available buyer. Management has highlighted the recent high inflation in UK will benefit Wessex Water as revenue will be adjusted higher by 4.5% effective 1 Apr 2022.

Seraya Power. Management clarified the recent disappointing earnings of Seraya Power was mainly due to supply shortage from Indonesia to Singapore, resulting Seraya Power to source from spot LNG at high prices. Earnings are expected to recover in coming quarters. Management is looking forward to the completion of acquisition of Tuaspring CCGT (pending approval from PUB), which will improve Seraya’s cost structure and strengthen its market share.

New ventures. Management has clarified the disposal proceeds from ElectraNet would increase YTLP’s flexibility to deploy its cash reserves towards viable new businesses that complement its existing assets. We expect the new ventures to be related to data centres (acquired Dodid in Singapore) and solar power (acquired 664 ha land in Kulai for 500MW LSS), as well as supporting JV development of digital banking license (with Shopee).

Dividend. With the disposal in place, we foresee YTLP’s balance sheet to improve considerably and expect continuation of dividend payout in FY22 (paid 4.5 sen/share in FY21).

Forecast. Unchanged.

Maintain BUY, TP: RM1.05. Post management update, we uphold our BUY recommendation, with higher TP: RM1.05 (from RM0.75), based on 10% discount to SOP: RM1.16 as we believe the current valuation is relatively undemanding, while dividend yield may surprise on the upside.

Source: Hong Leong Investment Bank Research - 22 Apr 2022