Journey to Wealth
YTL Power International - No PPA extension dims prospects
- We maintain HOLD on YTL Power International (YTLP), with an unchanged fair value of RM1.68/share based on a 15% discount to a sum-of-parts value of RM1.98/share.
- We maintain YTLP's FY13F-FY15F net profits as our forecasts have not incorporated any extension in the sale of electricity from the group's Malaysia-based power plants post-September 2015.
- YTLP's Paka and Pasir Gudang power plants were not included in the 10-year extensions to their power purchase agreements (PPA), according to the Energy Commission's announcement yesterday. Only three companies have secured extensions to their PPAs ' 675MW Genting Sanyen, Segari Energy Ventures' 1,303MW in Lumut and TNB Pasir Gudang's 275MW block.
- Additionally, the YTLP-Marubeni Corp consortium also failed to secure the 1,000MW-1,400MW Prai combinedcycle gas-fired power plant. The Energy Commission awarded the tender to Tenaga, which proposed a plant with a capacity of 1,071MW and a levelised tariff of 34.7 sen/kWh.
- We believe these developments are largely within market expectations. Likewise, we have not included any extension to the PPAs or new power plant concessions in our DCF valuation for the power division.
- We remain concerned about:- 1)Need to find a replacement for the two power plants over the next three years as our preliminary estimates indicate that the cessation of their operations could shave group earnings by up to 15% in FY16F.
2)Lack of domestic catalysts for the stock as the heightened competitive landscape dims the group's prospects in securing fresh concessions in Malaysia.
3)Further losses in the Yes WiMax division, given the group's rising capex. Recall that the group has indicated that Yes will need a subscriber base of 1 million (vs. over 400,000 currently) to break even.
4) Uncertainties in new investments such as the group's investment in a 30% stake in an Estonian state oil company-led oil shale project in Jordan, which could cost up to US$5bil.
- It has been speculated that 1MDB could make a bid to acquire YTLP's power plants. But this is uncertain without a PPA extension as the Energy Commission had indicated that PPA renegotiations will not be revisited after the Track-2 tender. But upside risks to the stock stem from the possibility of holding company YTL Corp undertaking a privatisation exercise for YTLP.
- The stock currently trades at a fair FY13F PE of 10x ' within its three-year diluted PE band of 10x-16x. But current gross dividend yield of 2.8% appears mild for a stock with a recurring earnings profile.
Source: AmeSecurities
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