Project facilitation fee has ballooned to over RM29 million in FY2019 from RM3.8m in FY2014 and RM9.6m in FY2015. While the 2016 IPO prospective detailed breakdown of the project facilitation fee in FY2015 (i.e. from Terminal Kampar, Kemaman and Kota Bahru) totalling RM9.67m which was 2.5% of total project GDV of RM386.48m.

With a project facilitation fee of RM29.35m in FY2019, it means such fee was earned from projects with total GDV of RM1,174m assuming the same 2.5% fee margin. What were these projects that cost over RM1.17 billion?

How do you address the elephant in the room issue - project facilitation fee and all from a single party - Maksima Timur Sdn Bhd?!

The project facilitation fee issue has been elaborated by Choivo Capital at:

https://choivocapital.com/2020/05/23/perak-transit-berhad-the-peculiar...

You are welcome, dick20 & Observatory.

As minority shareholders, we can only rely on the controlling shareholder to create more value for the company and declare higher dividends. When they create more value like buy assets cheap and sell it high to unlock value (eg. made a return of 24.8 times from Electranet in 20 years) then distribute more dividends or declare a special dividend. When they do that, all minority shareholders, passive investors like EPF and themself as major shareholders will benefit.
I agree with you that when Dato' Yeoh Seok Hong accepted the interview with media and grumbled about the low share price of YTLPower, he definitely wanted more parties to appreciate the value in the company.

As YTL Corp holds majority in YTLPower and relies a lot on dividend streams from the latter, and Yeoh Tiong Lay & Sons Sdn Bhd gets all cashflows thru dividends from YTL Corp, the family fortune relies very much on continued high dividends from YTL Corp and hence YTL Power.
To me and to them, cash flows of the companies and dividends are more important than share price, but as higher dividends are declared, the share price will move higher naturally. As long as dividend yields exceed 6.0% p.a., it will attract passive investors or funds like EPF to buy and hold.

The same logic applies to YTLPower-Wessex. YTLPower would be re-rated only if it disposed of an asset and bring back the money or the underlying asset performs well and contributes good dividends.
We can only rely on funds that buy as passive investors like EPF and retailers to push share price of YTLpower up as it starts to deliver stronger earnings and declare higher dividends.

One recent example is the proposed acquisition of Genting Bhd's 53% stake in Genting Singapore by MGM US. Why MGM wanted to acquire the stake in Genting Singapore, and why not buy into the parent Genting Bhd which is trading at a huge discount?

There are a number of reasons:
1) the 53% stake would give MGM a controlling stake in Genting Singapore
2) Singapore dollar is seen to strengthen further and has little risk of devaluation
3) Singapore is stable with little country risk nor regulatory risk

Genting's 53% stake in Genting Singapore is worth more than its entire market capitalisation but to a foreign fund like MGM, the holding company discount means nothing if it cannot get a sizable block in Genting Bhd at such a discount.

The depressed share price of YTLPower currently is due to foreign funds pulling out of Bursa in general and also partly due to weak earnings in past few quarters. But things may change for the better when its various assets start to deliver, starting with PowerSeraya and Yes 5G, then the green data centre park venture and hopefully power export to Singapore and Jordan power station commercial operation.

@Obsevatory, if you remember from the Daibochi privatisation saga, funds like Samarang that had a small stake in Daibochi did not have any say in the privatisation attempt by Scientex boss at a low offer price. What the fund could do was to reject the offer. So funds at most just keep a small 5%-6% stake to ride on the long term growth of the company which they have no say.

In the case of YTLPower, why so little foreign fund has invested into it? The main reason is as I said above the currency risk. Another one is the holding company discount. Foreign funds which buy into an asset always prefer a sizable block of over 20% equity stake so as to be able to equity account for the earnings, eg. KKR for a 25% stake in Northumbrian.

However, YTLPower is tightly held by the Yeoh family and foreign funds know that it will be hard for them to get any sizable block of shares over 5% without going to Yeoh family themself. And to buy a sizable block of shares from Yeoh family would likely fetch a high premium over market price.
Furthermore, any fund that has over 10% stakes in YTLPower may not even get to appoint a director into the board which is tightly held by Yeoh family and allies. Hence the fund buyer would not get any control nor first hand information over the asset they invest in, they can only be a passive investor.

But for Tenaga, the situation is not so rosy. Even though it enjoys monopoly in the electricity transmission and distribution, there is a huge risk associated with its generation segment in terms of fuel cost pass-through. As we know, the residential and commercial electricity tariffs are fixed here, so any fuel cost increase will need to be absorbed by Tenaga first then only it tries to claim back through the fuel cost pass-through mechanism which is to be approved by the government of the day. Given that coal prices and LNG prices have more than doubled since last year, Tenaga is having tough time in passing through the escalated fuel costs. There is no guarantee that it will be always able to claim back fully the extra fuel costs. To foreign investors, this represents a risk too big to take. But local analysts seem to be more comfortable with our government honoring the fuel cost pass-through. I would not take the risk.

As for KKR, the investment in Northumbrian Water will look even more attractive with projected equity cash flows of 4.9% and potential extra gain from strengthening sterling later. And this is a perpetual asset in a AAA rated country with very strong regulatory framework, so there is no regulatory risk nor political risk.

In the case of Electranet sale, it is unique as the buyer who bought over the 33% stake from YTL Power was already a major shareholder in Electranet. The super-annuity fund knows the asset and the regulated business well and being an Australian fund, the buyer would have no currency risk at all. So to them a 2.5% dividend yield at the onset but increasing over years would look attractive to the fund.

Why foreign funds shun Malaysian utilities? One main reason is currency risk, as US Fed is aggressively raising interest rates while Bank Negara is struggling to catch up to defend ringgit.

UK pounds sterling is at decades low against the US dollar, so it makes UK assets attractive to US funds who may enjoy additional returns from any strengthening of sterling few years later.

Foreign funds who want to invest in Malaysian stocks or bonds need to consider the weakening ringgit. They see another 5% to 10% downside risk of ringgit to the US dollars. Hence they will need to get extra 5% to 10% upside in any Malaysian stock or bond before they will put their money in.

Looks like AEON has hit a temporary bottom at 1.28. Hope it is on its way to retest previous high of 1.69 soon, possibly by August end when the June qtr result is out

Yes for regulated assets like Wessex and Northumbrian Water, operating cashflows netted out of equity share of capex for the year will be the equity free cashflows available for dividend distributions. There is a prescribed gearing ratio that these companies need to observe, around 68%-70% as set by some of their bonds or regulator determination.
For budgeted capex of the year, they can borrow money to fund the capex up to the max allowable gearing, the rest to be funded by equity.
As they spend on capex, the PPE increases and hence the allowed amount of debts also increases to maintain the same gearing ratio.
For some companies that have a lower gearing ratio than max permissible of 70%, they can borrow more for capex and hence allow more equity money to be distributed as dividends.

Perhaps they could find another bigger US or Canadian fund to flip it to at 1.6x RCV few years later?

It is for sure that KKR will use heavy leverage to buy the 25% equity stake in Northumbrian. For a top class asset like Northumbrian, I think KKR could get 80%-90% debt financing for the stake purchase.
Being a PE investor, KKR obviously is taking advantage of the weak pounds sterling and the still low interest rates in the US to bet on a strong rebound in pounds sterling few years later. As from asset operations wise, I am not sure how much KKR could squeeze out of it besides the expanding RCV. One possibility is that KKR may see lower capex requirement than what Northumbrian has budgeted for the 2021-2025 regulatory period, hence potential higher dividend payouts. Northumbrian gearing is already at 69.8% close to the max 70% allowed, so there is little room for capital management to squeeze out more cash.
I can only think of the above 2 possible reasons. Perhaps KKR saw something we don't.

From currently on parity with the USD, if pounds sterling appreciates back 30% to 1.30 against USD, KKR would be getting (4.9% x 4 ) x 1.3 = > 25% returns in 4 years

As water companies in the UK are experiencing high inflation and high capex phase, an investment holding company from Asia (eg. CK group) may find the 4.9% equity return low compared to potential opportunities in Asia or other emerging markets. But for a US or western fund, a 4.9% equity return would be decent compared to its low borrowing costs. Furthermore, KKR is buying into Northumbrian when pounds sterling is trading at decades low compared to US dollars. With its RCV increasing over time, Northumbrian would be worth a lot more few years later when pound sterlings appreciates against the US dollars.

I am sure Mr. Li or CK group would have evaluated the deal thoroughly and weigh it with any higher return it could get elsewhere, compared to a 4.9% equity return it would get from Northumbrian Water should it continue holding onto it

Whether a water asset in the UK should be valued at 1.04 - 1.08x RCV or 1.50-1.60x RCV, it ultimately bores down to how much an investor would get in terms of equity cashflows relative to its borrowing costs.
That is why I always like to check it from cashflow perspective if a deal would make sense.

I hope I have not made any fatal mistake in the calculations above. Pls help me to check through the calculations and arguments above.
If the above calculations are right, then the latest KKR deal in Northumbrian Water would simply reinforce my conviction that Wassex Water would be valued at 1.50-1.60x RCV, which means YTLPower is very very much under-valued.

Assuming the £246.3m capex was 70% funded by debts, then equity cashflow would be reduced by 73.9m pounds and hence cashflow yield would be £137.3m / £3,141m = 4.4% which would be still higher than US 30-year bond yield of 3.10%

At equity value of £3,141m, potential investors in Wessex would be getting cashflow yield of £211.2m / £3,141m = 6.7% which is not too far off from the 6.9% KKR will be getting from Northumbrian Water

If at 1.53x RCV that KKR is paying for Northumbrian Water, Wessex would be valued at 1.53 x £3,566m = £5,456m on Enterprise Value (EV).

Minus off net borrowings of £2,315m, the equity value of Wessex would be £5,456m - £2,315m = £3,141m or RM17.2 billion or RM2.10 per share of YTLPower

YTL Power only paid 544m pounds for 100% equity value of Wessex Waters in 2002 or at 16% discount to RCV then. Wessex's RCV has increased by 142% from 1,£1474m in 2022 to £3,566m in 2022.
The discount YTLPower paid in 2002 would make a big difference in determining how much returns it will make from Wessex

As for returns to Li's CK group, it does look like a lower-than-expected return of 3,468m/2,400m or 44.5% returns in 11 years. I guess it all depends on the valuation Mr. Li or CK group paid for Northumbrian Water back in 2011. It might have paid for it at also 1.5x RCV then so it has only benefitted from the organic growth in RCV of Northumbrian Water in past 11 years.

It we look at the deal from cashflow perspective, KKR is getting quite a reasonable deal. Northumbrian reported operating cashflows of £239.5m before capex for FY2021.
Hence the equity money it is paying would be getting 239.5/3468 = 6.9% equity cashflow yield which is not bad.
Assuming the capex of £231.5m for FY2021 would have been funded 70% by debt, equity funding of the capex would have been £69.45m reducing equity cashflows to £170.05m or equity cashflow yield of 4.9% which is still decent relative to US short-term borrowing costs of 1.75% currently or US 30-year bond yield of 3.10%

Observatory, thanks for highlighting the KKR deal in Northumbrian Water. KKR is paying £867m for 25% equity in Northumbrian Water, valueing the latter at £3,468m. I would like to point out that this is the equity value KKR is paying for. The Enterprise Value (EV) for Northumbrian Water would be:
EV = Equity value + Total Borrowings
= £3,468m + £2,962m
= £6,430m
Based on its RCV of £4,196.4m, this deal effectively values Northumbrian at 6,430/4,196.4 = 1.53x RCV
which is within my ballpark valuation of a top grade water company in the UK

We need to wait till things get clearer and inflation get under control before funds will flow into stocks again. YTL earnings will remain resilient even under high inflation environment. Good time to accumulate more on weakness.

foreign funds pulling out while US Fed is aggressively raising interest rates, local institutions are keeping cash high, retailers stay at sidelines or get stuck with gloves, plantation, oil & gas, utilities, tech stocks, consumers, telcos, etc. Nothing is spared this round.

I think this downtrend may continue until at least early August, after the next US Fed meeting and inflation data for July is out

Well said @observatory.

Yeoh family has been lamenting about how badly the market has underpriced their companies' share price. Even they cannot change how the market and other investors view the value of their companies or assets. They just need to find the right time to unlock value, just like how they disposed off Electranet.

That's the reason why I proposed to YTLPower to list up part of its stakes in Wessex Waters in a way to quickly realise the value of Wessex, and at the same time to take back some handsome cash for special dividends or future expansions. They may or may not consider it as they know the value of Wessex will always go up in time. They just need to make sure the asset is well managed in terms of operational efficiencies as well as corporate finance wise.

I think that cash flows are more important than share price fluctuations, as long as the various operating assets perform to expectation, cash flows will come and share price will follow.
I am not concerned at all with the current depressed share price level, it just gives me more time and chances to accumulate more.

No update on the Jordan project yet

If the 5G business, data centre business and power export to Singapore project take off well, and PowerSeraya earnings post strong rebounds from FY2023, I am very confident YTLPower will be a 10 bagger in time.

If we don't look too far away, just take current RCV of 3,566m minus off debts 2,315m, current equity value of Wessex is worth 1.6x 3,566 - 2,315 = 3,390 million pounds or RM18.7 billion or RM2.27 per share

That is 3.3x the current market cap of YTL Power, and you get all the other assets like PowerSeraya, 5G business, data centres and net cash of RM2.2 billion for free!

If we take a more conservative approach in estimating the increase in RCV:
2022 3,566m
2027 3,566 +500m = 4,066m
2032 4,066 + 600m = 4,666m
2037 4,666 + 700m = 5,366m
2042 5,366 + 800m = 6,166m

Hence, RCV would increase to 6,166m pounds in 20 years and Wessex would be worth 1.6x 6,166 = 9,866 million pounds
Debts will increase to 2,315 + (6,166 - 3,566)*67% = 4,057 million pounds
Equity value will be 9,866m - 4,057m = 5,809 million pounds or RM32 billion or RM3.90 per share

Wessex Waters RCV has increased by 2.4x from 1,474 million pounds in 2002 when YTLPower acquired it to 3,566 million pounds as in 2022.
Just imagine if its RCV increases by 2.4x again in next 20 years, Wessex RCV will balloon to about 8,600 million pounds by 2042. If valued at 1.6x RCV as per valuation given to Electranet, Wessex would be worth 13,760 million pounds or RM77 billion then.

Assuming the increase of 5,044 million pounds of asset value is funded 67% by debts, total debts at Wessex would be 2,315m + 5,044m*67% = 5,694m pounds. Equity value would be 13,760m - 5,694m = 8,066 million pounds or RM45 billion or RM5.50 per share!!

@observatory, thanks for the news piece on LKS asset in the UK. This generally reinforces my view that regulated assets in the UK (and in other AAA/AA+ rated countries) are very much sought after for its long term appreciation potential and value protected by regulated tariffs.

As for LKS, I think YTLPower would not sell or list up Wessex Waters at low value, or for anything below 1.5x RCV. The longer it holds out, the regulated capital value base will just get larger along with inflation.
Wessex looks set to add easily another 500 million pounds to its regulated capital value by end of this 5-year regulatory period in 2025, when the new water tariffs for 2026-2030 shall be set based on the enlarged RCV and Wessex will enjoy much higher tariffs and revenue.

By extension, the estimated RM6.0 billion of debts sitting at PowerSeraya level may be covered by interest rate swaps too, I hope. Then the rising interest rate impact on YTLPower will be smaller.

Take an earlier example, when YTLPower secured the right to build the first private power station in Malaysia back in 1993 and tried to secure financing for the project, interest rates were going up to as high as 10%-12% in 1994-1997. When no local commercial bank then was willing to lend fixed rate loans, YTLPower approached EPF for a 10-year loan at fixed rate of 10% p.a. That move basically helped YTLPower fence off any interest rate movement risk from the project for 10 years. True enough interest rates went down to single digits after 2000, but the fixed rate loan has helped it to weather through uncertain periods.

Similarly, PowerSeraya always hedges almost 100% of its fuel cost requirements and also forex requirements for as far as 2 years. Hence its margin will not be affected directly by huge swings in fuel prices.

To add on the interest rate issue for Wessex, there are abundant supply of financial instruments like interest rate swaps that Wessex can buy to hedge against adverse interest rate movements.
Typically YTLPower management is very conservative and will not take any risk on commodity price movement nor FX nor interest rate movements. I expect Wessex Waters to have entered into some interest rate swaps in 2020 when the water tariffs were being set, so as to protect it from any adverse interest rate movements over 2021-2025.

In the case of YTL Power, I am expecting total dividend of 5.0 sen for FY2022 then possibly 7.0 sen for FY2023, giving a dividend yield of 7% for FY2022 rising to 10% for FY2023. These are way above returns provided by putting money in fixed deposits that pay only about 3.0% p.a. Though Bank Negara is expected to raise OPR by another 25bp + 25bp later this year, at most you will get 3.5% from FD and abour 4.0% from government bonds.

I think there is sufficient buffer in YTLPower's dividend yields that make it attractive relative to fixed income.

It is true that when interest rates increase, yield seeking investors may demand higher yield from dividend stocks. Everything is relative. For instance, current US Fed rates are at 1.75%. A common stock that gives a 4% dividend yield may still look attractive to investors. But as US Fed raises interest rates by another 75 bp in end July then another 50 bp in subsequent 2 meetings later this year, US Fed rates may touch 3.5% and hence risk-free bond yields may also go up to same level or slightly above. Then the common stock that offers 4% dividend yield will not look so attractive anymore compared to the returns in investing in risk-free bonds.

@observatory, the water tariffs for Wessex Waters are pre-determined by Ofwat for every 5 year period using its own assumptions on inflation (RPI), capex requirements, interest rates etc for the next 5 years, eg. Ofwat used 5-year forward assumption of RPI and interest rates for 2021-2025 when it made the determination in 2020.
While there is an update in RPI every year when Ofwat updates the assumption using the latest data, I am not too sure if Ofwat also adjust its interest rate assumption every year to get an out-turn adjustment for the next year tariff.
If not, there will always be a final adjustment at the end of each 5-year period to account for the difference in actual data vs Ofwat assumptions.

YTL vs YTL Power - which one to buy is up to your own judgement on which one may run up first. Each has own merits:
YTLPower has direct exposure to earnings surge from PowerSeraya, 5G business, potential power export to Singapore and new data centre business;

while YTL Corp has direct exposure to booming cement business, potential reviving of high speed rail project and potential monetisation of unlisted hotels and landbank

The recently acquired Tuaspring plant will increase the efficient power generation capacity of PowerSeraya by 20% and is estimated to contribute gross profit of SGD73m to SGD120m a year from FY2023 onwards as written in my earlier article below:

https://klse.i3investor.com/web/blog/detail/dragon328/2022-06-02-story...

I am hoping for the increased earnings from PowerSeraya and maiden earnings contribution from its 5G business to help offsetting the increased interest expenses.

For the balance RM15.0 billion of net debt at YTL Power and its other subsidiaries, a 25 basis point increase in average interest rates will result in RM37.5 million higher interest expenses for a year. Bank Negara has raised interest rates by 0.25% a couple of months ago and looks set to raise another 0.25% in early July. Economists project another 0.25%-0.50% hike in the remaining meetings in Sept or Dec 2022. So we need to brace for a total 0.75%-1.0% hike in interest rates in 2022, resulting in higher interest expenses of RM112m - RM150m for FY2023.

While its businesses are mostly recession proof and are not affected by high inflation environment, rising interest rates may be a dampening factor. YTL Power had about RM27.8bn net debt as of 31 Mar 2022, out of this an estimated RM12.8bn debts sit in Wessex Waters level.
The rising interest rates in the UK will increase interest expenses for Wessex Waters but I see this rising cost should be properly compensated by higher water tariffs.