YTLPOWR is acquiring another power asset - Tuaspring in Singapore for SGD331m, to consolidate with PowerSeraya in the future. In view of the tough business environment and PowerSeraya posting losses in the past six quarters, we expect a near-term negative from the acquisition of this 396MW combined cycle power plant. For now, we keep MP on the stock with revised TP of RM0.58.

Acquiring another power asset in Singapore. Yesterday, YTLPOWR announced that its wholly-owned subsidiary YTL PowerSeraya Pte Ltd has proposed to acquire the power plant and associated assets of Tuaspring Pte Ltd from the receivers and managers of Tuaspring’s banking facilities provided by Maybank for a total purchase consideration of SGD331.45m or c.RM1,004.3m, to be settled by: (i) SGD230m cash, and (ii) SGD101.452m comprising ordinary shares and loan notes amounting to 7.54% equity stake in YTL Utilities (S) Pte Ltd (YTLUS), the immediate holding company of YTL PowerSeraya. Under the agreement, Maybank will be granted a put option, exercise any time within 3 years enabling Maybank to require YTLPOWR to purchase the 7.54% equity stake in YTLUS at a purchase price of SGD40m.

The 396MW combined cycle power plant was commissioned in 2016 which was originally constructed as part of a water desalination project following a tender held by Public Utilities Board of Singapore. Following defaults by Hyflux, the ultimate owner of Tuaspring, the Water Purchase Agreement was terminated in 2019. The proposed acquisition of assets comprise principally a land lease over a site located at 90, Tuas South Avenue 3, Singapore with a 20-year remaining term and 396MW combined cycle power station and stocks and associated assets. The acquisition is expected to be completed by the end of 2QCY20.

Negative in the near term. Given the lack of financial disclosure, judging from operating losses at YTL PowerSeraya in the past six quarters while this Tuaspring asset is under receivership, we believe that Tuaspring could be a loss-making company. In view of difficult business environment for the power sector in Singapore, this acquisition is unlikely to have positive earnings impact to YTLPOWR, worse still, it may drag earnings lower should Tuaspring is unable to turn around in the near term. As such, the rationale of this acquisition could likely be for long-term benefit.

Still tough; maintain MARKET PERFORM. Given the lack of information, we are unable to quantify the financial impact to YTLPOWR. Thus, we keep our estimates for now. On the other hand, we have yet to factor in Attarat Power Plant in FY21 pending completion of the power plant construction. Meanwhile, the recent heavy sell-down in the stock market, of which YTLPOWR was not spared, has brought most stocks into another new low level with YTLPOWR falling 19% YTD. However, we are not inclined to upgrade the stock given the uncertainty from the market as well as its earnings prospects. Thus, we maintain our MARKET PERFORM with a lower target price of RM0.58 from RM0.68 as holding company discount to its SoP valuation increased to 40% from 30% to reflect the uncertainties. Upside risks to our call include a sudden turnaround at both PowerSeraya and YES.

Source: Kenanga Research - 13 Mar 2020