News  YTLPOWR’s 60%-owned subsidiary, YTL Communications Sdn Bhd is acquiring a 60% stake in Konsortium Jaringan Selangor Sdn Bhd (KJS) for RM49.8m from two parties of their 30% stakes each, namely Kumpulan Darul Ehsan Bhd (KDEB) and Ingres Software (M) Sdn Bhd.

 KJS is a JV company with the State Government of Selangor (SSG), via its wholly-owned subsidiary KDEB. The remaining 40% equity stake is owned by Jati Fleet Systems Sdn Bhd.

 KJS is the lead coordinator in respect of planning, implementation and maintenance of the telco infrastructure services in Selangor.

Comments  KJS has a 30-year Management Services Agreement which was signed in Dec 1999 with SSG to coordinate the planning, implementation and maintenance of the telco infrastructure services in Selangor.

 It was also awarded the Network Facilities Provider License by MCMC for a period of 10 years from Apr-05 to Apr-15. This allows KJS to sign the license agreement with Celcom, Digi and Maxis to build, own and lease telco structures and it currently owns over 100 such structures in Selangor.

 Given the limited information, we are neutral on the acquisition as the earnings impact on YTLPOWR. We believe KJS’ earnings are recurring in nature.

 A search from SSM shows that KJS is a profitable company. It reported flattish revenues of RM32.9m and RM33.9m in FY12 and FY13 (YE Dec), respectively, but PAT declined to RM3.8m in FY13 from RM5.7m in FY12.

 Based on the RM49.8m purchase price for a 60% stake, this implies 14.6x and 21.7x for FY12 and FY13 earnings multiplier, respectively, which appears to be demanding for an unlisted company. In addition, the listed peer, OCK (NOT RATED) is trading at lower historical valuations of at 9.6x and 17.7x for FY12 and FY13.

 Assuming KJS is able to maintain its earnings at the FY13 level, this could contribute only a meagre RM2.3m PAT to YTLPOWR which is less than 1% of group earnings. However, we believe the acquisition is not for earnings accretion but to complement its existing YES and BestariNet project. With the ready telco structures in Selangor, YTLPOWR could reduce capex for infrastructure.

Outlook  This acquisition is unlikely to have any material impact to YTLPOWR’s earnings but more to complement its existing telco business. With this and the growing subscriber base, earnings prospects for YES are set to be better.

 The strong SGD should benefit YTLPOWR although the electricity market in Singapore remains competitive with new capacity coming into the market. While the GEN1 PPAs are expected to expire soon next year, the recently awarded Track 4A should bridge the earnings gap in 2018 when it is due for commissioning. For Wessex Water, earnings are expected to be fairly flattish until it gets the next tariff revision.

Forecast  No changes to our FY14-FY15 estimates.

Rating Maintain OUTPERFORM

Valuation  Retain our price target of RM1.77/share which is a 10% discount to its RNAV of RM1.97/share.

Risks to our Call  Lower dividend payouts, widening YES’ losses and the rise in global economic risks, especially in Europe.

Source: Kenanga