Higher tax due to Cukai Makmur has been expected.

But the impact of higher fuel gas costs is unexpected. Among PGB four businesses, only Utilities have non pass-through input gas cost. Utilities gross profit has reduced substantially by over 70% YoY, from RM75m to RM22m.

Gross profits have also declined across three other businesses. But according to Hong Leong analyst, "PGB will be able to recoup back the higher fuel cast costs for its Transportation and Regasification segments in subsequent period"

Looking further ahead, need to watch out whether earnings will be reduced under RP2 (Regulatory Period 2) which runs from 2023 to 2025.

According to 1Q22 presentation,
Group Operating Revenue +6.3%
Group Gross Written Premium +9.5%
Group core profit before tax RM184.8m (versus RM130.7m in 3M21)

Both GI and life have recorded increases.

While the numbers look good, there are areas of concern in Life business.
New business value was RM59.1 million, decreased by 28.5%
This was mainly due to lower sales from agency, where agency ANP has decreased by 26.9%.

While current year profit has increased, it's the growth in NBV that will deliver the growth of future profits for life.

Is the decline in agency sales a temporary setback?

What is your view on the results?

https://www.allianz.com.my/content/dam/onemarketing/azmb/wwwallianzcommy/pdf/investor-updates/2022/2021_Q4AMBAnalystBriefing.pdf

India's LIC IPO is priced at 1.1 times EV, significantly less than the 4 times EV mentioned by media earlier.

https://www.reuters.com/business/insurance-giant-lics-27-bln-ipo-indias-largest-opens-subscription-2022-05-04/

Intco Medical 2021 results:
Revenue
1Q21 CNY6,735m
2Q21 CNY3,940m
3Q21 CNY2,972m
4Q21 CNY2,593m

Net Profit to Owner
1Q21 CNY3,736m
2Q21 CNY2,143m
3Q21 CNY1,064m
4Q21 CNY487m

Full year results:
http://www.szse.cn/disclosure/listed/bulletinDetail/index.html?17214293-13b3-4ff8-970a-cdb821d0a06d

Intco Medical 1Q2022 results:
Revenue CNY2,288m
Core net profit attributable to owners CNY93m
EPS CNY0.15
Equity attributable to owners CNY15,958m


Based on above, 1Q22 net margin is 4%
Based on today closing price at CNY35.6, assume EPS is maintained at current level, PE = 35.6/ (0.15*4) = 59 times
Annualized ROE = 2.3%

http://www.szse.cn/disclosure/listed/bulletinDetail/index.html?17533122-5e25-4c32-9a4a-1eb4a587ac9d

Dragon328, thank you for sharing your opinions.

I'm not sure if YTL Group is keen for its subsidiaries to have own listings. That would have introduced another layer among the listed entities. I also feel that even with subsidiaries listed, investors may continue to assign a hefty discount at parent level. The Genting group is an example (of course, not helped by investors' corporate governance concern)

Data centers will be a good business to get in. In China the central government designate certain poor provinces like Guizhou as priority data center areas, to help them to leapfrog their development. In Malaysia analysts like TM and Time as data center plays. However while we may have cheaper RE, Singapore has advantages in terms of larger MNC base, international fiber connectivity, talents and so on. Johor and the federal government need to up their game if they want to grab a slice of the market from Singapore to JB.

Dragon328, great sharing!
In actually took me two separate readings over two days to finish your analysis and all the comments here. I think this blog could serve as a good placeholder for serious discussion on this stock.

I have two concerns, which I believe we briefly discussed some time back. I wonder whether you've factored into your projection.

Wessex Water - The allowed regulatory return for 2020-25 has been reduced. I got the impression in your analysis that it was due to the low interest rate environment then. Therefore it may revise upward in future periods if inflation goes higher.
However as mentioned in the CIMB Apr 22 report (page 3), "UK (Ofwat) has determined for Wessex Water will cut average bills by 13.0% in real terms in the 2020-25 period". It seems that the regulator also keeps increaing the standard, and Wessex Water has to continuously raise its efficiency just to stay in place.
Even though the RAB continues to build up, Wessex Water needs to strive very hard just to maintain its profits.

Selling RE from Kulai solar farm to Singapore - In late 2021 Malaysian government banned renewable energy export to Singapore. So the company, probably with the help of the Johor state, needs to get the federal government to lift the ban for the venture to work.
Then today I read in the paper that Johor Chief Minister talked about setting up data centers in Johor powered by renewable energy. It suddenly strikes me that could it be connected to the earlier ban. Could that Malaysia want to keep its renewable energy (solar farms require large amount of land, a precious commodity in Singapore) to develop data centers as alternative to Singapore?
Of course nothing may stop YTL Power from developing both solar farm and data center in Johor. However it will then be difficult to make any profit projection as the situation is so fluid.

Look forward to your opinion on these two points.

@Nikola, thank you for replying. I agree with your points. Rationally all the players you've mentioned have self interests to conclude the deal soon.

But I'm looking for potential spoiler. So far I don't see any opposition from politician, be it from the opposition camp or the "court cluster" fraction. However there is still a possibility that the parliament may be dissolved before necessary approvals are granted.

I don't think it's a coincidence that the proposal target completion date coincides with the PH and government MOU expiry date at 31 Jul.

Haha, I'm certainly not suggesting anyone to enter at this price. In fact I've offloaded some, but wonder whether I should hold on the remaining given the downside is also limited given the future dividend streams. However, someone who can assess the situation properly may spot a bargain if there is one. 8% gross margin when annualized is still rather attractive as the deal is to be closed by end July.

@Nikola, appreciate your insightful analysis, which I fully agree.

Since the announcement, Litrak price has inched up from around RM4.4-4.5 to current level about RM4.7. Analysts mentioned the disposal is equivalent to RM5.08 cash per share. Assuming no further assets or liabilities at holding company level, let’s assume shareholders can expect to get back about RM5.1 in a few month time upon delisting. That means current price still has about 9% discount to potential full value.

The discount probably reflects the uncertainties you mentioned – hiccups in ALR’s Sukuk arrangement, and more likely the acquisition gets derailed due to political reasons, on top of time value of money.

Balancing the uncertainties against the current share price discount, do you think the market is overly cautious, or optimistic, or just about right?

After such a high profile scandal, it's unimaginable that offenders will be let of with just a slap on the wrist. Such action has damaged the image of Malaysia stock market. Foreign investors will rightly doubt our authorities' impartiality and the will to prosecute wrongdoings. Some institutional investors may stay away or at least assign a discount to stock markets where financial accounts could be manipulated with little consequence. All Bursa investors will suffer the long term consequences.

Just to clarify that my earlier comment is about the highway acquistion proposal, and not about Gamuda valuation/ prospect.

Among Gamuda major businesses
1. Highway - The business only contributes about 20% to 25% of group's earnings. Unlike Litrak, Gamuda's share price has limited response to the news given the overall impact to Gamuda is limited. Besides there is not much valuation surprise.
2. Construction and Engineering - The past few months see Gamuda succesfully replenishes its order book after being awarded with projects in Singapore and Sydney. There is also a high probability of MRT3 tunnel project. However this business should be valued at 12 to 15 times PE with around 180-200m annual net profit. As mentioned by someone, the share price has recovered a lot, mostly in response to the good news in this business over the last few months.
3. Property - This is a major business. Gamuda exposure is not only in Malaysia but also Vietnam. I believe any further share price appreciation has to rely on better performance in property.

Maybe there could be further share price upside with coming GE and prospect of other projects like SMART 2 or Penang island reclamation. But personally i also feel that the stock is fairly valued. I've also taken some profit.

Based on the proposed deal, at max Kesas & Smart can be extended up to 6 years, and LDP & Sprint up to 10 years. However, if the traffic growth and toll revenue are better than expected, ALR’s sukuk can be paid down faster and toll concession shortened.

According to The Edge ALR shares are owned by their five board members with extensive industry background. They can’t take profit out. They will have to seek government and bondholders approval if they want to sell their shares. Assuming for the worse, if they have a personal profit motive, the only way I can think of is higher expenses like salaries or outsourced services etc. But ALR promises transparency and biannual detailed reporting. Something Malaysian public should monitor.

It’s a win-win situation for government and shareholders, as government saves on toll compensation, and shareholders get to monetize their assets (Gamuda can plough back into upcoming projects). Probably no change for highway motorists who still pay the same toll for roughly the same number of years. But assuming government’s toll compensation saved is well spent (like no more 1MDB!), all Malaysians should benefit.

The win-win is possible because it replaces expensive equity capital (from Litrak and Gamuda, which have lower debts) with cheap debt capital obtained by ALR through Sukuk. It’s like the difference between buying a property with mostly cash versus mostly borrowings.

A few points mentioned in recent Affin and AM Bank reports on MFRS 17 implementation
1. Adoption in 1 Jan 2023. Management to give high level disclosure in middle of this year
2. Expected 2023 net profit to dip 15% to 20%
3. Management guided it will take 6 years for profit to normalize to pre-MFRS 17 (I don't understand this point. If profit drops by 20% and it takes 6 years to recover, does it mean profit only grow at 3% p.a.? It seems too pessimistic. Maybe I've misunderstood.)
4. Present value of future profits, known as CSM (Contractual Service Margin), will be carved out from retained earnings on Day-1 adoption. CSM is expected to be 30%-40% (Affin report)/ 30%-45% (AM report) of retained earnings
5. According to Am Bank forecast, book value per share will grow to RM2.5 in FY22, but drop to RM1.7 in FY23.
6. My own take is since book value is expected to drop more than net profit, ROE should be higher, and therefore a higher price to book ratio should be applied. But I'm not sure about the relative magnitudes.
7. The analysts also highlight that change to MFRS17 is an accounting re-representation. There is no underlying business change.
8. Management believes they can sustain the dividend payment of 12 sen per year despite lower profit.

As to why Gamuda share price only gains so little, note highway concession business only contribute to 20-25% of Gamuda valuation. Besides, the offer price by ALR matches most analysts' valuation for Gamuda highway business. It means there is little surprise for Gamuda, apart from expectation of some special dividend.

@Hemsley, as commented earlier, if the deal falls through, Litrak management is likely to issue a new Sukuk at more or less the same term. The cash raised can be distributed as a special dividend given Gamuda's need for cash to fund its mega construction projects. The special dividends will not as high as 5.08. But it's likely to be still substantial, coupled with future dividend payout. When all future cash flow is discounted to present value, my estimate is the value will still be around 5 based on 7% discount rate, which is in line with reported 6-8% discount rate in the DCF valuation cited by analysts.

Say it again here. I thank EVEBITDA who has mentioned this idea in the i3 forum in last Oct, which prompted me to further accumulate the shares.

My own strategy is I may dispose some if share price goes higher, but don't mind keeping it too for aforementioned reason.

The CEO of this company is Sydney Lawrence Quays. He started working with Starbucks while Jalil was still a student.

Based on Litrak's announcement, the anticipated equity value is RM2,698m, not far from RM2.75b offered by the PH government in 2019.

Looking back to my conversation with @EVEBITDA in late Oct last year, he was spot on in highlighting that the value of a revised deal would still be near to the 2019 offer price despite reduced concession period.

Yes, without this offer we can expect increased dividends over the next 10 years, or a one time special dividend as Litrak issues a new bond as EVEBITDA has suggested then. However, if you discount those future expected cash flows based on a discount rate of 7%, the total value today is about RM5 too, quite similar to current offer.

So shareholders can accept the deal, get the money now (assume all distributed), and find and invest in another stable investment that yields at least 7%.

ICAP management and their board won't be bothered with spending more money on pursuing the case. After all, the expenses are paid from the company fund, which anyway is idle cash kept in bank accounts with practically zero return after management fee and taxes!

A perfect example of value trap!

Who should be blamed? Ultimately it's the shareholders. Up to last year there remained shareholders representing about 43 millions or 30% of company shares still voted for these board members. My sympathy to those shareholders who still harbor the delusion that the board and the manager look after their interests. It must be too painful to admit mistake!

Check out page 22-23 of the latest The Edge edition. There was an interview with CEO Shafie.
1. Average capex was RM400-500m between 2012-19, but will reduce to RM200-300m in the next few years
2. 30% capex on technology; 40%-50% on a mall rejuvenation program; remainder on maintenance
3. Elaboration on its digital platform.

The digital platform and mall rejuvenation could bear fruits, but only in the future.

For the near term, taking the capex guidance of RM250m, using previous simplified calculation, resulting free cash flow = RM699m – RM159m (payment of lease liabilities) – RM129m (interest paid) – RM250m = RM161m or 11sen per share?

The key assumption is in the RM699m Operating CF as recorded in 2021. The PBT for 2021 was RM131m.

The 2016-2020 PBT ranged from RM102m to RM197m per year. With a more optimistic scenario of about RM200m PBT in 2022, the FCF can increase to about RM230m, or 16 sen per share. However the CEO is cautious about the current year prospect.

@dragon328, I agree DNB's equity stake is cheap if it's only valued at RM2b. Afterall it comes with 5G spectrum, an asset that could worth many billions in competitive auctions. I assume RM2 billion because the government needs to placate and incentivize all the MNOs; and partly compensating them for accelerating their 4G asset depreciation.

The CIMB report also shows the Maxis's estimate of 5G wholesales fees under current DNB commercial offer. Coverage fees for 2022/23/24/25 and thereafter are estimated at RM36m/RM303m/RM403m/RM432m. Additional capacity fee kicks in from 2027 onwards. Note that is on per MNO basis. However it has to be set against Maxis's annual revenue of RM9b.

From YES perspective, it has to quickly grow its current annual revenue from just RM541m in FY2021 to at least several billions. Otherwise the ~RM400m annual 5G coverage fee and even higher capacity fee thereafter will not make sense.

Using your assumption of RM100 per subscriber per month, a target of RM3 billion annual revenue will require RM3b/ (RM100*12) = 2.5 million subscribers, slightly larger than its current subscriber base.

Not an impossible target. But it has to be very aggressive in marketing considering currently there are few 5G use cases. It could be a hard sell to current subscribers, at least for now. However could be more opportunities with commercial and industrial clients. I'm sure the big boys are eyeing this segment too.

The government will negotiate with MNOs (mobile network operators) on their equity stake in DNB. I try to do a rough calculation on how much it could cost YES.

According to DNB website, the 5G rollout will cost RM16.5b. Currently it's based on borrowing. Let's assume the negotiation eventually ends with an equity valuation of RM2b. As government retains 30%, MNOs will fork out RM2b * 70% = RM1.4b to take up their combined equity stake.
https://www.digital-nasional.com.my/

The next question is how will the equity be allocated. In today CIMB report it assumes all MNOs take up equal stake. By counting Digi-Axiata as one MNO, each including YES will have 14%. Applying my RM2b valuation assumption, the stake will cost RM2b * 14% = RM280m.

However the allocation maybe based on current market share. 2021 Annual Report mentions YES subscriber base is 2.36m customers. As of 2019, there were 44.6m mobile subscribers nationwide (including non-4G). Assuming the number is still the same, it means YES has a market share of about 2.36/44.6 = 5.3%. If DNB equity is allocated based on the current market share, YES will only need to fork out RM2b * 70% * 5.3% = RM74m.
https://www.malaysianwireless.com/2020/05/mcmc-fixed-broadband-mobile-subscribers-malaysia/

So the necessary one time investment probably ranges from RM74m to RM280m. This amount is to be set aside before arriving at the potential dividend payment.

Yes, good news to YTL Power. If SWN fails, it could be very expensive for YES to build its own 5G network given it has a smaller subscriber base to spread the fixed cost. With SWN, the infra cost becomes ongoing opex. Although the annual fee paid to DNB will ramp up after an initial discounted period, YES will have time to compete and expand its user base. As all telcos will have the same coverage and line quality, it will be easier to win over new subscribers.

But more importantly I believe this is the right choice for the country. The MOF's offer of DNB equity stakes to incumbent mobile network operators is fair and expected. It's not the objective of government to earn money through DNB monopoly in the first place. The government's role is to speed up 5G rollout.

However it's important to install safeguards such that after becoming DNB shareholders, Maxis, Digi, Celcom and the like cannot abuse their positions to slow down the 5G rollout. Otherwise they may be tempted to slow down the rollout so that they have more time to milk their existing 4G assets before they have to spend more on 5G.

https://www.theedgemarkets.com/article/ytl-communications-calls-mobile-network-operators-support-govts-5g-vision

Today Public Investment Bank publishes a report which seems to favor Dual 5G Network promoted by Maxis, Digi, Celcom and U Mobile, over the Single Wholesale Network (SWN) by DNB and supported by TM and YES.

https://klse.i3investor.com/web/blog/detail/PublicInvest/2022-03-15-story-h1600247359-Telecommunications_Single_or_Dual_5G_Network_For_Malaysia

It is pending cabinet decision. This is a mess. Why did the government push for SWN and sign up with Ericson without thinking through the resistance from vested interests which are the incumbent telcos? Without all telco coming on board, DNB will fail. How to pay Ericson for the work already done?

The logic of building two 5G networks purportedly to introduce competitions is like setting up another power transmission and distribution network to compete with Tenaga. It just doesn't make sense.

As for YTL Power, a single network will relieve it from massive capex of building its own 5G network, and thereby could compete with the big boys on equal basis.

Hope the cabinet comes to its senses rather than cowing to the vested interests.

@JJPTR, if there is a privatization and if it's based on share exchange like past practices, the ratio will be determined based on prevailing prices of the two companies.

Lets say they set offer price for YTLP at 72 sen, and establish that YTL recent average price is 48 sen, then it can be 2 shares of YTLP for 3 share of YTL. Something like that. The NTA consideration is not important.

But to be clear I raised the prospect of privatization as a long term possibility, only if share price continues to be depressed, and also considering YTL past records.

@cktay, given the different businesses have different characteristics, I agree sum of parts approach is right way.

Given PPA assets have finite lifetimes and predictable cash flows, they can be valued using DCF. Other assets may be valued differently. Then sum up the parts and apply a discount. But the discount will be very subjective.

I suspect if done properly, the sum before discount will be very larger than current market price.

But the discount may not be narrowed just because it exists. There are companies where market caps are even below net cash. Theoretically if someone could borrow and acquire the entire company at that price, he will still end up with extra cash after settling his borrowings, and a debt free company!

To close the discount gap we need catalysts like increased dividends. Alternatively it could be a special dividend from ElectraNet sales proceed (management has ruled out) as it gives the idea that shareholders may share the cash from future asset monetization.

Absent of that, in my view it's safer to value the entire group based on dividend yield because dividends are tangible.

I checked my source of ElectraNet's RAB again. As stated in 2021 Annual Report page 10,

"ElectraNet’s regulatory asset base (RAB) has grown from AUD0.75 billion (approximately RM2.2 billion) since acquisition in 2000 to AUD2.96 billion (approximately RM9.25 billion) as at 30 June 2021."

YTL Power sold its 33.5% equity stake for for AU$1.026bil (RM3.15bil). That valued the 100% equity value of ElectraNet RAB at AUD1.026b/0.335 = AUD3.06b, about 1X to the 2021 RAB at AUD2.96b.

But the transaction amount includes both equity and loan notes. So rightfully, the amount fetched for the equity portion should be even lower than AUD1.026b. Not sure what details I may have missed out.

There might be another reason for the share price discount. Knowing that the assets are deeply discounted, and with the multi-year decline in share price, there is a real possibility of privatization in the future should the trend continue.

There is ample of precedence with YTL Corp. It already has three privatizations under its belt over the last decade. Based on the past records, any privatization is likely to be non-cash but share exchange with YTL Corp. And don't expect a good premium.

This is the history:

1. In 2012 YTL Cement was delisted through a share swap to YTL Corp. No cash.
Note when YTL Cement was privatized, it was in a net cash position, below book value and single digit PE, while parent YTL Corp was in net debt. Beside YTL Cement was taken private just before the construction boom began!
https://www.asiasentinel.com/p/ytl-why-so-stingy-3?s=r

2. In 2016 YTL e-Solutions was delisted through yet another share swap to YTL Corp. Again no cash!
Although smaller in size, YTL e-Solutions had similar characteristics as YTL Power with its low risk stable return. It owned spectrum which it leased to YES. According to The Edge report below, before privatization YTL e-Solutions was paying above 7% dividend yield and owned a high cash pile.
https://www.theedgemarkets.com/article/zero-premium-privatise-ytl-e-solutions-fair

3. In 2019 YTL Corp again delisted YTL Land & Development. Share swap again!
Note that 2019 was the low point in property market. If not for the subsequent pandemic, it is conceivable that the market would have recovered, and YTL Corp might have scored another good privatization timing.
https://www.theedgemarkets.com/article/ytl-land-set-delist-ytl-corp-has-9045-company

This is also the reason that Malayan Cement minority shareholders are concerned after YTL Cement acquired Lafarge Malaysia (later renamed as Malayan Cement); and further extended its control by injecting YTL Cement assets. To be fair Francis Yeoh has given repeated assurances that they will keep Malayan Cement public. But it's unclear how solid his commitment is.

Percentage as well as market cap wise, the potential "gain" from privatizing Malayan Cement is less as YTL Cement already owns 79% of its shares. Besides this has not taken into account of its huge block of ICPS.

But temptation for privatizing YTL Power will be much larger. YTL Corp and Yeoh's family only own 65% in total. There are another 35% under valued shares to be acquired if they find a way.

The privatization factor is irrelevant if we only want to ride on the turnaround theme in the short term. But should consider the probability if we intend to sit through until the share price discount gap is closed.

@dragon328, I checked The Star article after reading your message. Just as you've pointed out earlier, Datuk Yeoh voiced the same opinion that the market overlooked the company's regulated asset bases which were growing in value. He lamented that the market only valued YTL Power on dividend basis.

But it's also a fact that shareholders everywhere will discount assets, including cash, if they don't see prospect of above cost of capital growth, or greater cash return through dividends or buybacks. Can't blame investors for being cynical. While controlling shareholders can decide what to do with the assets, minority shareholders only see them on paper.

If Datuak Yeok wants to change the market, the easiest way is to a return a portion of the cash from EletraNet monetization back to shareholders. The market will immediately pay attention and ascribe values to potential monetization/ growth of other assets. Since the Board doesn't share the direct benefit with shareholders (beyond promise of better future return through better investment), I can sympathize with the market skepticism.

But to be fair, even if YTL Power is valued as a dividend stock, the current share price is more than adequately supported if the Board can just maintain the dividend level. As we discussed, current dividend level can be sustained, if they choose to. Looking back to the past, the share price would find support wherever dividend yield reaches 7% (the chart is available in Maybank reports).

The decline in share price over the years were due to dividend cut, from 10 to 5 and now 4.5sen. While pursuing other good opportunities, the Board should also raise its dividend level if they seriously want to close the discount gap.

There are many obstacles to YTL Power's ambition to sell green electricity to Singapore potentially from solar farm installed on the newly land in Kulai.

The very first obstacle is, as quoted in the article below, "On 22 October 2021, the Ministry of Energy and Natural Resources (‘KETSA’) announced that the Malaysian Government had decided to allow only electricity generated from non-renewable energy resources to be exported to Singapore1 as part of the cross-border electricity sales framework in Malaysia. This is a departure from the previous requirement set out in the Guide for Cross-Border Electricity Power Sales"

Note also this restriction only applies to export to Singapore, but not Thailand! I wonder what is the motive or objective of our Ministry.

https://www.lexology.com/library/detail.aspx?g=03891f87-4223-4d80-bdea-be18965a9708

The renewable export ban to Singapore will not be the only challenge. Recall even for domestic market, the Energy Commission has restricted the bid size for its LSS (Large Scale Solar) tenders. In the LSS4 concluded in 2021, the maximum capacity allowed by each bidder was only 50MW, far smaller than YTL Power's ambition. Even Tenaga could only get 50MW. Assuming future LSS tenders also adopt such fragmented small scale supplies, YTL Power will not be able to leverage its large piece of land, even for the domestic market!

https://www.thestar.com.my/business/business-news/2021/03/16/10-listed-firms-win-lss4-projects

And the combination of Johor land and solar farm lead me to another curious event. On the eve of LSS4 tender award last year, the Sultan of Johor abruptly cancelled a planned 450MW solar park project in Pengerang. He blamed on the federal government's "silence" on the project.

https://www.theedgemarkets.com/article/johor-sultan-cancels-rm14b-solar-projects-groundbreaking-ceremony-blaming-putrajayas-silence

How will these factors play out? I'm sure the management is well aware of these obstacles before they went ahead with the land acquisition. Have they worked out some feasible plan together with the Johor state?

Hope the newly acquired land won't remain an oil palm plantation many years from now!

@cktay, that's a useful info. But not entirely unexpected. As the article mentions, Indonesia imposed a similar coal export curb in January. It also imposed Domestic Market Obligation on palm oil recently, initially 20% and then raised to 30% a few days ago.

I wonder if heavy handed tactics have ever been used on IPPs like Jawa Power? As mentioned earlier, the profitability is very high for utilities business. It could be the legacy of difficulties in attracting foreign investment during the 90s (Operation started in 2000, two years after the 1998 Asian Financial Crisis that hit Indonesia hard and the downfall of Suharto). I wonder if any later governments ever "regretted" giving away a generous deal and tried clawing back some benefits.

I have the same question over Attarat project in Jordan. What are the agreed returns? As good as Jawa Power?

Attarat's shareholding structure, where the Chinese and YTL Power each owns 45%, with the remaining 10% shared by Estonia and Jordanian interests, means it's almost a fully foreign owned project. What is the track record of foreign investor protection in Jordan?

@dragon328, thank you for you reply. Now the last segment, the 60% interest in YTL Communications which operates YES.

This challenge was much harder than Francis Yeoh had imagined. In 2011 he asked shareholders to be patient and thought it would turn around in 2 years time. But the business has been in loss every year except 2019 where it turned a tiny profit. But the onset of pandemic knocked it off course again, recording RM191m and RM265m losses in FY21 and FY20.

https://www.theedgemarkets.com/article/yeoh-expects-ytl-comms-turn-around

I notice YES and TM are the only two mobile network operators backing DNB's Single Wholesales Network (SWN), probably seeing it as the best chance to level the playing field. But the fate of SWN is still uncertain. The transition to 5G will also take at least 3-4 more years.

Analyst attribute YTL Power weaknesses partly to "contribution to a corporate social responsibility programme". I suppose they refer to the free access given to students across the country. While it may have generated a lot of goodwill and even future customers, I wonder what is the cost. Should we expect RM100m-200m loss per annum for the next few years?

BTW what's your view on its 80% interest in Tanjung Jati, which was based on a lucrative PPA signed by its partner back in 1998. It was supposed to achieve financial closure a few years ago but still pending.

Someone's prediction of RM1.3 a year ago came through. But with this fortress like balance sheet, and management willing to SBB, the ultimate target of 65 sen will prove much harder, even if the next quarter is in red.

Market cap = RM2,745m
Net cash = RM3,150m
Net cash after setting aside Meru expansion = RM1,390m
Net debt after setting aside capex Meru + Phase 1 US expansion = RM80m, or net debt to equity ratio of mere 1.6%
Of course, the highest return comes from SBB

@cktay, dragon328 has explained that the unavoidable imperfection in hedging means PowerSeraya is exposed to fuel cost fluctuation. You may read his comments again.

To get a better idea on Tenaga's ICPT mechanism, and how the KWIE fund buffers fuel cost fluctuation, refer to article below.
https://www.energywatch.com.my/blog/2020/07/20/whats-next-for-malaysias-electricity-bill/

The question not addressed in that article but has been raised before is what happen when KWIE fund runs out.

I have no idea. But one got to be skeptical when the prediction comes from a company with vested interest. As I've commented many months ago, I have yet to see F&S or any other research houses talking down industry prospect in their clients' IPO prospectus.

But this is also common sense. As I've commented before, the economic law of supply and demand applies, especially to commoditized products like gloves where commissioning new capacities take just 12 months. It happened to oil & gas a decade ago. It happened to solar panels. It will happen to semiconductor in the not too distant future, although the greater complexity there means it will take a bit longer than gloves. But supply glut will eventually arrive.

On Barbazon project, which is a mixed-use residential and commercial property project in Bristol, UK, I wonder why get into property development. If YTL wants to pursue property development in UK, shouldn't the ultimate parent company YTL Corporation Berhad take it up instead?

It's the same with the 2018 non-core acquisition of a hotel Bel Air Den Haag Baheer B.V. in Netherland. It was probably acquired by YTL Power because YTL REIT did not have sufficient financial capability to close the deal then. This transaction was viewed negatively by analysts.

In my opinion such opportunistic moves into non-core businesses does not sit well with investors who want to focus on infrastructure business.

(D) Investment Holding Activities
As explained in Page 27 of Annual Report, this segment captures the interest in ElectraNet, Jawa Power, and the Brabazon Development in UK.

In page 174, Note 15b, it is stated that the group has 20% interest in PT Jawa Power. But footnote explains the subgroup's direct interest is 35%. I don't understand what it means. I just assume it owns 35% interest.

I'm positively surprised that dividends received from Jawa Power were RM377m and RM350m in FY21 and FY20 respectively. Looking further back, dividends were RM386m, RM346m, RM354m, RM370m for FY19-16.

It seems that Jawa Power is a very profitable venture. FY2021 ROE = net profit 884m/ year end equity 4,411m = 20%. This seems too high for a utility company.

As explained in Jawa Power website, it started commercial operation in 2000 with a 30 year PPA. So anyway the good time will end by 2030. It's important to develop new businesses to replace this cash cow.

Besides nowadays coal power plants also come with ESG discount. I read that YTL tries to overcome by exploring the possibility of a solar farm in newly acquired Kulai land.

@dragon328, since you mentioned, let's touch on businesses outside UK and Singapore.

(C) Power generation (Contracted)
First, according to the page 19 of 2021 Annual Report, the already expired Paka PPA and yet to be commissioned Jordan's Attarat are parked under segment Power Generation (Contracted).

Given currently there is no operation, the segment recorded zero revenue and pretax loss of RM11m in 1HFY22.

What I don't understand is the segmental assets. As shown in page 232-233 of Annual Report (Note 38), segment assets were RM323m in FY2020, but reduced to RM188m in FY2021. Annual depreciation was only RM20m and there was no impairment. I'm puzzled by the over RM100m reduction in asset value.

Obviously the RM188m segment asset does not account for the Attarat power plant which YTL Power has 45% equity stake. According to Wikipedia, the project costs USD2.1billion and shareholders will invest USD528 million. The construction is supposed to be near completion
https://en.wikipedia.org/wiki/Attarat_Power_Plant

Attarat balance sheet information can be found in page 172, note 15a(i). I wonder why it's not reflected in the segmental information.

The already shelved Top Glove's IPO document dated 29-Oct-2021 can still be found in Hong Kong Stock Exchange website. Page 105 of the document shows the infamous ASP forecast by Frost & Sullivan. F&S is a leading market research company used by Top Glove for its IPO.

https://www1.hkexnews.hk/app/sehk/2021/103952/a110765/sehk21102900066.pdf

According to the F&S projection, which was widely quoted and believed, ASP for nitrile gloves would be USD75.1 and USD42.9 in 2021 and 2022; latex USD39.8 and USD26.3 respectively.

But as we just entered 2021, Top Glove ASP already dropped to USD19, lower than pre-pandemic level!

Always treat the forecast of market research firms, especially those hired by the IPO companies to promote their wares, with a bucket of salt!

Top Glove production utilisation recovered to 73%. Finally demand is picking up.

But assuming shipment quantity is the same as production quantity, ASP = (1449/4.186) / (0.73*100/4) = USD19, which is below pre-pandemic price.

Effects of low ASP show up in the latest quarter operating margin of 7.8%, as compared to 9.4%, 12.3%, 9.8% in pre-pandemic years FY17 to 19.

Assuming current PATAMI RM87.549m is near term sustainable profit, annual PATAMI = RM350m. At the noon closing price of RM1.80, market cap is RM14,415m. So PE is 41 times!

Unfortunately I can't find such financial disclosure for PowerSeraya. Maybe its not asked by Singapore regulator.

I try applying the same method to work out the FCF. This is what I found from the Annual Reports for the multi utilities business (merchant)

(1) Depreciation and amortization for FY18-21 are RM319m, RM233m, RM251m, RM254m.
(2) Capex for FY18-21 are RM103m, RM104m, RM93m, RM176m.
(3) As previously noted and as you pointed out, PBT was volatile but seemed to be on a recovery track. For FY18-21, they were RM72m, - RM242m, - 172m, RM275m. But there were the impairment charges of RM72m in FY19, RM2m in FY20, and reversal RM71m in FY21. Excluding the impairment effects, core PBT of FY18-21 should be +RM72m, -RM170m, -RM170m, RM204m. (Quarterly report shows 1HFY22 PBT was RM90m)

For FY22, I assume depreciation is RM260m. Annual maintenance capex RM100m. Tax rate 15%. Assume other items are constant or insignificant, and no major capex.

In the scenario where FY22 core PBT is RM180m (double of 1HFY22), the potential FCF = RM180m + RM260m - RM100m - RM180m*0.15 = RM313m.

In the more pessimistic scenario where FY22 core PBT is zero, the potential FCF = 0 + RM260m - RM100m = RM160m.

It seems that PowerSeraya use borrowings and new equity shares to fund TuasSpring acqusition (which as I understand has not been completed). As reported in Maybank Mar 2020 report, the acquisition would be "funded by SGD230m (RM696.9m) in cash (to be financed through borrowings) and SGD101.45m (RM307.4m) book value of 7.54% Equity Interest in YTL Utilities (the immediate holding co of PowerSeraya) "

Without other major capex, and given that depreciation is higher than capex, PowerSeraya should also be able to contribute cash to the parent even if it barely breakeven.

Is this a fair assessment?

@dragon328,

I overlooked the fact that as net asset grows, debt could also grow while still keeping debt to equity ratio constant.

Anyway I found that Wessex Water Services Limited's (WWSL), the operating company, publishes its financial statements in its annual reports as required by the regulator. This will be a good source of info to work out valuations at subsidiaries level.

Based on the financial statements, the actual dividends paid from 2017 to 2021 were Pound Sterling 90.5m, 92.0m, 90.0m, 88.0m, 59.5m. The subsequent 6 months interim report shows dividends of Pound Sterling 34m. It seems that the current dividend level is set at around 60m per annum, in line with lower profit under the new regulatory period.

Assuming this is the level for the next few years, we can expect 60 million * 5.5 = RM330 million annual dividend contribution per year.

@dragon328, thank you for the great sharing! I'll like to focus on Wessex first.

I agree that a matured and stable business like Wessex Water will likely be funded through internal funds and borrowings. It shouldn't tap the cash from its parent anymore. But I wonder how much cash can Wessex contribute back to parent in the next few years.

This is important since YTL Power is a dividend play. Assume market expectation for FY22 DPS is 4.5sen (Maybank 5 sen, Affin 5 sen, CIMB 3.4sen, HL 3sen, RHB 5.2sen), it will need to distribute 8,102m shares * 4.5sen DPS = RM365m of cash. Such cash generation capability should come from normal operation and not one off asset sales like Electranet.

Given Wessex Water is the largest profit contributor and a matured business, I would expect it to shoulder most of the responsibility.

I did some back of the envelope calculation. However t I fail to come up with the necessary FCF from Wessex. Not sure if I've missed out something. Anyway this is what I did.

The Annual Report does not provide cash flow info at Wessex level. So I deduce from whatever info available on the segmental information (page 232, note 38 of 2021 AR).

(1) First I note the Water and Sewerage's equity = segment assets - segment liabilities = RM23,449m - RM21,460m = RM1,989m. Gross debt to equity = RM15,820m/ RM1,989 = 8X, which probably implies limited scope for further borrowings.

(2) As mentioned earlier, the PBT has declined in recent years: RM739m (FY2019), RM610m (FY2020), RM494m (FY2021), RM550m (annualized from 1HFY22 PFT RM275m). I therefore assume a sustainable annual PBT at RM600m in the next few years.

(3) FY2021 depreciation reached RM703m. Assuming FY2022 depreciation is even higher at RM750m due to high capex.

(4) FY2021 capex was RM1,490m, in line with 5 year spending of RM7.5b within current regulatory period. So assume annual capex RM1,500m.

(5) Assuming others items are insignificant or stable, operating cash flow = PBT + depreciation - tax (Wessex 2021 annual performance report shows effective tax rate is 13%) = RM600m + RM750m - RM600m*0.13 = RM1,272m

(6) The resulting operating cash flow is insufficient to cover annual capex of RM1,500m

Have I missed anything in my calculation or assumptions? If no, then will have to expect little cash from Wessex in the next few years to help pay dividends to shareholders.

(B) PowerSeraya in Singapore
1. 100% equity stake. Acquired in 2009

2. In 2020 acquired Tuaspring Power which has a 396MW CCGT power plant for about RM1b.

3. With the consolidation consolidation, PowerSeraya now controls about 25% of market.

4. However the effects of over-supply and stiff competitions in the past have not been fully reversed. The Multi Utilities Business (Merchant) segmental PBT were over RM700m in FY2012-13, ~RM500m in FY2014, ~RM300m in FY2015, ~RM100m in FY2016-18, about ~RM200m losses in FY19-20 before registering RM275m PBT in FY2021.

5. Segment PBT in 1HFY21 shrank again to only RM90m (compare to 1HFY20 RM182m). Hong Leong report on 25 Feb said it was due to "surge in fuel cost" at Seraya. It seems that despite hedging, the business could not 100% shield itself from rising natural gas price, and cannot fully pass on the cost increase to consumers.

6. Apparently PowerSeraya is also involved in oil trading and tank leasing. Not sure about the scale. Could these non-electricity business contribute to the fluctuation in profits?



I stop for now. To continue with other businesses in another day. Meanwhile I look forward to thoughts on above businesses.

After looking up some reports, I gained a better understanding on the YTL Power businesses. I share them as below. This is partly to reinforce my understanding, and partly to invite feedbacks from @dragon328 and other shareholders who have studied this company.

(A) Wessex Water in UK
1. 100% equity stake. Acquired in 2002

2. Key profit contributor

3. From 2021 Annual Report, "Over the current 5-year regulatory period, Wessex Water will undertake capital investments of RM7.5 billion (GBP1.3 billion), resulting in a total RAB value in excess of RM22.4 billion (GBP3.9 billion) when the regulatory period ends in March 2025."

4. With RM7.5b capex over a 5 year period, an average capex of RM1.5b should be factored in when computing FCF.

5. However, in Feb 2021 Fitch rated Wessex Water holding company at BBB-, and the subsidiary service company at BBB. In other words, just one notch above speculative grade.

6. It seems that the key reason is regulator Ofwat has set tougher cost and performance targets.

7. In the Hong Leong report dated 28-Aug-2014, the allowed weighted average cost of capital in FY10-15 was 5.5%. Based on Fitch report, it was 3.7% in FY15-20. Current period FY20-25 allowed WACC is only 1.96%. (in real term)

8. The discount rate seems very low to me. For comparison, recently Malaysia Energy Commission maintained the WACC at 7.3% (nominal term) for Tenaga in RP3 that runs until 2024. The real WACC for Tenaga will still stay at 4.3% even if inflation hits 3%.

9. The trend of decline could be seen in the Water & Sewerage segmental PBT. During FY2015-18, segment PBT was above RM900m a year. In FYT2018 it almost hit RM1b. This was followed by continuous decline which was RM739m (FY2019), RM610m (FY2020), and RM494m (FY2021). 1HFY21 is RM275m. In other words, PBT from this key contributor has declined to RM500-600m a year.

10. In my view, with the trend of reducing profit driven by the regulator, the valuation of Wessex Water may actually declines despite increased RAB.

https://www.fitchratings.com/research/corporate-finance/fitch-affirms-wessex-water-at-bbb-outlook-stable-25-02-2021

@dragon328, thank you for the valuable inputs, which will be very useful to me when I study as I know what I should pay attention to. Will look into the details.

I wonder if the recent weak sentiment has to do with underperformance at PowerSeraya. I recall reading a report mentioning that it suffers from high natural gas price input. However the annual report mentions it has done hedging (but not sure to what extent).

Besides I read that Singapore electricity market runs a 3-monthly auction. Supposedly any higher fuel cost can be passed through albeit with delay? This should become easier after the market consolidation where YTL Power bought Tuas Spring and became market number 2.

With their strong balance sheet, I have no doubt that Malaysian big four, Intco Medical, Sri Trang, and above mentioned clean room glove specialist Riverstone, and probably a number of others will not just survive, but business will expand in coming years.

However, while company may grow, investors' return will depend on valuation, which is determined by future growth rate, margin, and the prices they pay. Past valuation level may not be a good guide if the landscape has changed too much.

I agree with @bang_miskin's view. Buy in stages and have a diversified portfolio. And hold for long term.

From Liu Fangyi's background, I believe he has a western and liberal outlook. He went to US in 1989, if you recall the year of Tiananmen.

He got into Caltech, so must be a very brainy student. He dropped out from study to start a glove business to capitalize on the demand brought by AIDS, indicating entrepreneurship and typical American adventurism spirit. Such entrepreneurship was demonstrated again when in 2020 he used personal borrowings to massively expand Intco capacity to capitalized on the Covid driven demand. It's no wonder that he has a strong following among Intco's shareholders.
https://inf.news/en/economy/386758c4781edfbb3c01a497289c20b8.html

He will be a formidable rival to Malaysian glove industry.

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