Affin Hwang Capital Research Highlights
YTL Power - Get It While Valuation Is Still Attractive
Get it while valuation is still attractive
We are upgrading YTL Power (YTLP) to BUY (from SELL) and raise our TP to RM0.95 (from RM 0.85) based on a 30% discount to SOTP valuation. At 0.45x PBV, YTLP is trading at 1.6 SD below its 5-year average PBV of 0.80x, which looks attractive. We expect the group’s earnings to start improving by late-2020, when its loss-making Singapore operations turn around and its 45%-owned associate APCO starts contributing. We revise down our FY20-21E EPS by 36-43% to reflect the weaker performance of Power Seraya and YES Communication. Notwithstanding weaker earnings, we expect YTLP to maintain its annual DPS of 5 sen, which translates to an attractive 6.9% yield that should support the share price.
We are upgrading YTL Power (YTLP) to BUY (from SELL) and raise our TP to RM0.95 (from RM 0.85) based on a 30% discount to SOTP valuation. At 0.45x PBV, YTLP is trading at 1.6 SD below its 5-year average PBV of 0.80x, which looks attractive. We expect the group’s earnings to start improving by late-2020, when its loss-making Singapore operations turn around and its 45%-owned associate APCO starts contributing. We revise down our FY20-21E EPS by 36-43% to reflect the weaker performance of Power Seraya and YES Communication. Notwithstanding weaker earnings, we expect YTLP to maintain its annual DPS of 5 sen, which translates to an attractive 6.9% yield that should support the share price.
DPS of 5 sen looks sustainable
Notwithstanding weaker earnings forecast, we expect YTLP to maintain the 5 sen annual dividend (6.9% dividend yield), supported by the earnings/cash flow from Wessex Water. Although Ofwat is cutting the return on capital from 3.60% to 1.92% starting in CY20, the impact on earnings is manageable, as the shortfall in revenue is compensated by a higher RCV run-off rate. While the operating environment of other operating entities (YES Communications and Power Seraya) remains challenging, we believe these entities are able to continue their operations without capital injections from YTLP.Turnaround in Singapore within the next 6-9 months
Affected by the overcapacity in the Singapore wholesale energy market, Power Seraya and its peers are loss-making, and this has forced one of its competitors (Hyflux) to file for bankruptcy protection. After 3-4 years of a challenging operating environment, we now expect the market to consolidate, as the overall capacity will be reduced by another ~10% within the next 2 years, lowering the reserve margin to below the 30% minimum set by the Energy Market Authority (EMA). We expect the wholesale selling price to rise to the Uniform Singapore Energy Price (USEP) level or higher.Upgrade to BUY with a higher SOTP-based TP of RM0.95
We upgrade YTLP to BUY (from SELL) with a higher SOTP-based TP of RM0.95 (from RM0.85). After several years of earnings declines, we expect YTLP’s earnings to start improving in FY21E on the turnaround of Power Seraya and maiden earnings contribution from APCO (Attarat Power Plant). At 0.45x PBV, YTLP now trades at sharp discount from its 5-year average PBV of 0.8x, which looks attractive. Key downside risks to our positive call are weaker-than-expected performance of its other non-core operations/ investments and YES Communications.Source: Affin Hwang Research - 26 Dec 2019
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