Dail y Focus Malaysia Equity Research PP 12941/7/2008 21 December 2007 Dail y Focus Malaysia Equity Research PP 12941/7/2008 30 January 2008 Refer to important disclosures at the end of this report. Highlights YTL Power: Poised for acquisition growth (Buy; RM2.53; YTLP MK; TP RM3.00) Story: YTLP is one of the few companies that has demonstrated a steady yield and commendable growth for regulated assets. Its acquisitions over the last few years including Wessex Water, Jawa Power and Electranet, have resulted in commendable FY05-07 net profit CAGR of 28%. Point: YTL Power is also well poised for further value- accretive acquisitions of regulated assets given its gross cash of RM6b. There is also scope for YTL Power to leverage on Wessex Water’s expertise to gain entry into Malaysia’s water concessions business. Relevance: We favour YTLP for its defensive earnings and stable dividend stream. We initiate coverage on YTLP with a Buy recommendation and SOP-derived target price of RM3.00/share. YTLP offers growth potential from new acquisitions and attractive net yield of 8.5%, thanks to a combination of cash and share distribution. Comments MISC: Joint Venture to develop LNG Business in Nigeria (Buy; RM9.45; MISF MK; TP RM11.70) MISC announced that it had entered into a joint venture with Nigerian National Petroleum Corporation (NNPC), Hyundai Heavy Industries Co. Ltd. and Deepwater Shipping and Maritime Company. MISC will have a 30% share in the Nigerian-incorporated joint venture company to be called Nikorma Transport Limited. The purpose of the joint venture is to provide NNPC business solutions for it to develop its LNG business. We are positive on this deal as it would also allow MISC to further expand its LNG business worldwide, although immediate earnings impact is expected to be minimal given the Group’s large profit base. Maintain Buy on MISC with a RM11.70 price target, based on 16x CY08 EPS. Catalyst for the stock includes new oil and gas projects. KNM: Secures 10 new projects worth RM185m (Buy; RM6.95; KNMG MK, TP RM9.70) KNM has clinched 10 new projects worth RM185m in total. The projects are awarded to KNM Process Systems Sdn Bhd, W E Smith Engineering Pty Ltd, FBM Hudson Italiana SpA and FBM-KNM FZCO, the wholly- owned subsidiaries of KNM in Malaysia, Italy, Australia, Italy and the United Arab Emirates respectively. Key Indices Close Chg KLCI 1,389 0.6% FBM30 9,118 0.6% FBMEmas 9,431 0.6% KL2nd 6,553 1.6% Daily Volume (m shrs) 787 Daily Turnover (RMm) 1,455 Daily Turnover (US$m) 449 Market Key Data (%) EPS Gth Div Yield 2006A 18.8 3.5 2007F 30.8 4.3 2008F 19.1 4.6 (x) PE EV/EBITDA 2006A 23.6 10.8 2007F 18.0 9.5 2008F 15.1 8.6 Stock Picks – Large Cap Price (RM) Target Price Target Company 29-Jan (RM) Return Large Cap Picks (Mkt Cap > RM2,000m) Public Bank-F 11.10 13.00 17% BCHB 10.50 13.00 24% PPB Group 10.40 13.70 32% AMMB 3.60 5.75 60% MRCB 2.69 3.60 34% Stock Picks – Small Cap Price (RM) Target Price Target Company 29-Jan (RM) Return Small Cap Picks (Mkt Cap < RM2,000m) Sunrise 2.80 4.90 75% Kinsteel 1.51 1.70 13% Evergreen 1.40 3.20 129% Southern Steel 2.52 3.00 19% TRC Synergy 2.19 2.95 35%
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Daily Focus Malaysia Equity Research PP 12941/7/2008 21 December 2007
Daily Focus Malaysia Equity Research PP 12941/7/2008 30 January 2008
Refer to important disclosures at the end of this report.
Story: YTLP is one of the few companies that has demonstrated a steady yield and commendable growth for regulated assets. Its acquisitions over the last few years including Wessex Water, Jawa Power and Electranet, have resulted in commendable FY05-07 net profit CAGR of 28%.
Point: YTL Power is also well poised for further value-accretive acquisitions of regulated assets given its gross cash of RM6b. There is also scope for YTL Power to leverage on Wessex Water’s expertise to gain entry into Malaysia’s water concessions business.
Relevance: We favour YTLP for its defensive earnings and stable dividend stream. We initiate coverage on YTLP with a Buy recommendation and SOP-derived target price of RM3.00/share. YTLP offers growth potential from new acquisitions and attractive net yield of 8.5%, thanks to a combination of cash and share distribution.
Comments MISC: Joint Venture to develop LNG Business in Nigeria (Buy; RM9.45; MISF MK; TP RM11.70)
MISC announced that it had entered into a joint venture with Nigerian National Petroleum Corporation (NNPC), Hyundai Heavy Industries Co. Ltd. and Deepwater Shipping and Maritime Company. MISC will have a 30% share in the Nigerian-incorporated joint venture company to be called Nikorma Transport Limited. The purpose of the joint venture is to provide NNPC business solutions for it to develop its LNG business. We are positive on this deal as it would also allow MISC to further expand its LNG business worldwide, although immediate earnings impact is expected to be minimal given the Group’s large profit base.
Maintain Buy on MISC with a RM11.70 price target, based on 16x CY08 EPS. Catalyst for the stock includes new oil and gas projects.
KNM has clinched 10 new projects worth RM185m in total. The projects are awarded to KNM Process Systems Sdn Bhd, W E Smith Engineering Pty Ltd, FBM Hudson Italiana SpA and FBM-KNM FZCO, the wholly-owned subsidiaries of KNM in Malaysia, Italy, Australia, Italy and the United Arab Emirates respectively.
These projects involve the design, manufacture and supply of mid-high end range products with an estimated EBIT margin of 25%. We expect EBIT contribution of RM46.3m from the new projects over FY08-09. The awards of projects reinforce our positive view on KNM and we expect more projects to be secured over the next few months. Nevertheless, we maintain our FY08-09 forecasts as this is part of ourassumed new orders of RM3b for FY08.
Earnings visibility for KNM is good with close to RM3b orderbook to be recognized over FY08-09. We maintain our Buy recommendation with a 12-month target price of RM9.70 based on FY09 PE of 25x. We continue to favour KNM for its strong earnings CAGR of 57% for FY07-09F, promising sector outlook and proven overseas expansion plans. Maintain Buy.
Details of the new projects include:-(i) KNMPS, from ABB Lummus Global BV-Toyo Engineering Corporation JV for Shell Eastern Petroleum (Pte) Ltd, to design, manufacture and supply columns for the Houdini BDX Plant;
(ii) KNMPS, from SNC Lavalin Inc to design, manufacture and supply third shift and methanation reactors and columns for the North West Upgrader Project;
(iii) KNMPS, from Saudi Kayan Petrochemical Company (an affiliate of SABIC of Saudi Arabia), to design, manufacture and supply splitters, demethanisers and deethanisers for the SK Olefins Plant;
(iv) KNMPS, from an affiliated company of Petronas (PSRI), to design, manufacture and supply columns and vessels for the PSR Project;
(v) FBM, from Techint Compagnia Tecnica Internazionale, to design, manufacture and supply methanol converters for the EMethanex Methanol Plant; and
(vi) WES, from Woodside Burrup Pty Ltd, to design, manufacture and supply butted kettle and tube heat exchangers and shell and tube heat exchangers for the Pluto LNG Project.
SP Setia: Signs agreement to develop land measuring 41.8 acres in Kota Kinabalu, Sabah (Buy; RM5.05; SPSB MK; TP RM6.10)
SP Setia has signed a development agreement with the State Government of Sabah to develop a land measuring 59.2 acres. The proposed development land is located approximately 5km from Kota Kinabalu City Centre and 2km from Kota Kinabalu International Airport. In return for the development rights to a parcel of land measuring 41.8 acres, SP Setia will build a new railway station and other ancillary buildings within the proposed development with combined costs not exceeding RM110m.
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SP Setia plans to build a shopping mall, a five-star hotel, a three-star hotel, condominiums and SOHO units with GDV of RM1.0b on the land. We are positive on the deal because of the good location and accessibility. In addition, Sabah is also expected to benefit from the anticipated RM105b in investments over 18-year implementation period under the Sabah Development Corridor (SDC) which was launched yesterday. We understand SP Setia will only launch the project soonest by 2H2009 and therefore, we maintain our current earnings estimates for FY08 and FY09.
We reiterate our Buy recommendation with a target price of RM6.10, which is based on 15% premium on its RNAV to account for potential land deals.
EON Capital: BNM approves DRB-Hicom to sell 20% to Primus (Buy; RM5.75; EON MK; TP RM9.00)
DRB-Hicom announced that it has been approved by the central bank, Bank Negara Malaysia (BNM), to dispose of its 20.2% stake in EON Capital (EonCap) to Primus Pacific Partner (Primus). Though no price was mentioned in that announcement, the Business Times quoted sources as saying the price tag is RM9.55/EonCap share.
Since this stake does not trigger a mandatory general offer (MGO), which is at 30%, there will be no MGO for minority shareholders. Nevertheless, there may be positive sentiment towards EonCap shares today following this announcement due to the possible entry of a new major shareholders.
Our forecasts and price target of RM9.00 (based on 1.9x BV) are unchanged. We reiterate our Buy call.
Automobile: Commendable growth for 2008 expected (Underweight under review)
New vehicle sales for December rose 14% y-o-y but fell 4% m-o-m to 42,244 units. The growth, we believe was driven by the introduction of Proton Pesona in August 2007 while consumption was propelled by government servant’s pay hike effective July 2007.
This brings full year 2007 new vehicle sales to 487,176 units, a marginal contraction of < 1%. This is above house projection of a 5% contraction to 466,229 units.
Stepping into 2008, MAA expects new car sales to surge 4.7% to 510,000 units. We are reviewing our projected 2% growth for 2008 for a potential upgrade on the back of an early indication of a successful launch of the Proton Saga Replacement in January 2008 and healthy consumption pattern. We also believe that a potential fuel hike, which could clip growth in vehicle sales (due to lower disposable income), may be partly mitigated by the RM9.6b withdrawal of EPF Account II (to pay monthly mortgage installments).
Thus, we are reviewing our underweight call on the sector for a potential upgrade. Top pick is MBM Resources (MBM MK; TP RM4.20) on easy valuations, credible parent i.e. Daihatsu and pole market position.
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Total industry volume (TIV)
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Company FocusMalaysia Equity Research PP 11272/7/2008 30 Jan 2008
Refer to important disclosures at the end of this report.
YTL Power Poised for acquisition growth
Story: YTLP is one of the few companies that has demonstrated a steady yield and commendable growth for regulated assets. Its acquisitions over the last few years including Wessex Water, Jawa Power and Electranet, have resulted in commendable FY05-07 net profit CAGR of 28%.
Point: YTL Power is also well poised for further value-accretive acquisitions of regulated assets given its gross cash of RM6b. There is also scope for YTL Power to leverage on Wessex Water’s expertise to gain entry into Malaysia’s water concessions business.
Relevance: We favour YTLP for its defensive earnings and stable dividend stream. We initiate coverage on YTLP with a Buy recommendation and SOP-derived target price of RM3.00/share. YTLP offers growth potential from new acquisitions and attractive net yield of 8.5%, thanks to a combination of cash and share distribution.
Global utility player. YTL Power (YTLP) enjoys good earnings visibility from its regulated asset with a 100% stake in Wessex Water Limited, a water and sewerage operator in the United Kingdom and an indirect 33.5% investment in ElectraNet Pty Ltd, the company which owns and operates the power transmission grid for the state of South Australia. YTLP also holds a 35% stake in PT Jawa Power which owns a 1,220MW coal-fired power plant in East Java, Indonesia. 65% of YTLP’s FY07 revenue came from outside Malaysia. Water and sewerage operation from Wessex accounts for 74% of FY07 EBIT, followed by power generation of 19.8% and investment holding of 5.8%.
Poised for growth with new acquisition. There is a tremendous opportunity for YTLP to acquire regulated assets in the region given its gross cash of RM6b. We envisage reduced competition especially from private equity firms, particularly when the subprime crisis is raising required rate of returns. Apart from its expansion in Indonesia, other potential new assets under consideration are new water concessions in Malaysia and Genco’s asset in Singapore. YTLP has proposed a RM2.2b bond in Nov 07 to refinance existing debts and to fund potential new acquisition.
Potential unlocking of asset value in Wessex? There is scope for YTLP to unlock value from Wessex Water as a new benchmark on valuation was set in October 2007, valuing Southern Water at EV/RAB of 1.4x. While we understand that YTLP is not planning to sell down its stake in Wessex in the near term, we cannot discount the possibility of the company doing so, if a lucrative offer is presented at a later stage.
Attractive net yield of 8.5%. YTLP declared net dividend of 11.2 sen and 1-for-25 share distribution in 2007. The combined FY07 net dividend yield based on share price of RM2.50 amounts to 21.2 sen or net yield of 8.5%. Given the improving cashflow from its water and power assets, we expect YTLP to maintain net dividend per share of 11.2 sen for FY08-09, with potential share distribution from its share buyback programme.
BUY RM2.53 KLCI : 1,388.50 (Initiating Coverage) Price Target : 12-Month RM 3.00 Reason for Report : Initiation of coverage Potential Catalyst: Acquisition of new regulated assets, potential new water projects and higher dividend payout. ANALYST June Ng +603 27110970 [email protected]
AT A GLANCE Issued Capital (m shrs) 5,313.6 Mkt. Cap (RMm/US$m) 13,390 / 3,881 Major Shareholders
YTL Corporation Bhd (%) 56.7 Employees Provident Fund Board (%) 8.4 Yeoh Tiong Lay & Sons Hldg (%) 4.0
Free Float (%) 15.0 Avg. Daily Vol.(‘000) 2,993 Consensus EPS (sen): 2008: 17.2 2009: 18.5 Variance vs Cons (%): 2008: (4.6) 2009: (10.2) Sector : Utilities Bloomberg/Reuters Code: YTLP MK/YTLP.KL Principal Business: Water and sewerage management, power generation and transmission
Company Focus YTL Power
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Investment highlights (i) Global utility player with proven acquisition track record Growth led by acquisitions. YTLP enjoys good earnings visibility with stable cashflows and earnings from its regulated assets from Malaysia, Indonesia and UK. YTLP’s acquisitions over the last five years including Wessex Water, Jawa Power and ElectraNet, resulted in commendable three-year FY05-07 net profit CAGR of 28%. 65% of YTLP’s FY07 revenue came from outside Malaysia. Water and sewerage operation from Wessex accounts for 74% of FY07 EBIT, followed by power generation of 19.8% and investment holding of 5.8%. Fig.1: Segmental breakdown and revenue breakdown by geographic location FY07 EBIT segmental breakdown FY07 Revenue breakdown
Source: Company Wessex is the key contributor. As illustrated in Fig.1, Wessex is the key contributor of YTLP, accounting for 74.4% FY07 EBIT. YTLP holds a 100% stake in Wessex Water. The concession was acquired from Enron for £1.24b in year 2002. Wessex Water provides water services to 1.2m customers and sewerage facilities to 2.5m customers over an area of approximately 10,000 sq km in the south west of England and operates under a rolling 25-year licence granted by the UK government. Wessex’s operation ranges from collecting and treating raw water, and storing and transporting high quality drinking water to households and businesses all around the region, to collecting, treating and disposing of sewerage safely back to the environment. IPP assets in Malaysia contribute 20% of EBIT. YTLP is the first independent power producer in Malaysia with two gas fired combined cycle power plants and combined capacity of 1,212MW at Paka Terengganu (404MW) and Pasir Gudang, Johor (808 MW). YTLP has a 21-year power purchase agreement (PPA) with Tenaga Nasional (TNB) till year 2015. The two local power-generation plants sell electricity to Tenaga Nasional under a long-term take or pay PPA. The annual revenue is more or less fixed right from the beginning and earnings growth is driven by costs savings and improvement in plant efficiency. The group’s IPP assets have another nine years to go and account for 23% and 22% of FY08-09 EBIT. Expanding Indonesian operation. YTLP also holds a 35% stake in PT Jawa Power which owns a 1,220MW coal-fired power plant located at the Paiton Power Generation Complex in East Java, Indonesia. Jawa Power is the second largest IPP in Indonesia and has a 30-year PPA with PT PLN (Persero), the state-owned electric utility company. Jawa Power posted the best ever performance in 2006 with high availability of 94.8% compared to 83% contracted under the PPA. PT Jawa is entitled for bonus payment for availability above 83%. The other shareholders of PT Jawa are Jawa Power Holding GmbH, a subsidiary of Siemen with 50% stake and PT Bumipertiwi Tatapradipta which owns the remaining 15%. We understand that YTLP is negotiating on expansion for PT Jawa. It is also developing a 2x55MW greenfield power plants at Sulawesi, Indonesia. Power demand growth in Indonesia is recorded at 6-7% over the last two years following the country’s industrialisation plan. Power transmission business in South Australia. YTLP has an indirect investment of 33.5% in ElectraNet Pty Ltd (ElectraNet), together with a 33.5% investment in ElectraNet Transmission Services that manages ElectraNet’s assets. ElectraNet owns, operates and maintains South Australia’s 5,566 km of high voltage transmission lines under a 200-year power transmission concession. The other partners in ElectraNet are Powerlink from Queensland and a fund under the Macquirie Group.
Water & sewerage74.4%
Investment holdings 5.8% Power
generation 19.8%
Others 3%Malaysia
32% United Kingdom
65%
Company Focus YTL Power
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(ii) Poised for growth with potential value-accretive acquisitions RM6b gross cash provides ample opportunities. YTLP has a successful acquisition track record with acquisitions of Wessex, PT Jawa and ElectraNet at attractive prices, resulting in commendable three-year FY05-07 net profit CAGR of 28% (refer to Fig.2). We understand that YTLP is actively looking out for new opportunities, focusing on regulated assets. Given YTLP’s gross cash of RM6b, there is a tremendous opportunity for YTL to acquire regulated assets in the region, and we envisage reduced competition especially from private equity firms, particularly when the subprime crisis is raising required rate of returns. YTLP has proposed to raise RM2.2b bond in November 07 to refinance existing debts and to fund potential new acquisition. We believe that new acquisitions will be funded mostly by non-recourse project financing loans. Fig.2: Commendable growth
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Source: Company, HwangDBS Vickers Research Looking out for new regulated assets. We understand that YTLP is more interested in green field utility projects given the high prices of brown field projects. For YTLP, its main advantage is the ability to conceptualise power projects from ground up, and securing the necessary funding at attractive costs, thanks to its solid balance sheet and track record. Apart from Indonesia, YTLP is also looking for potential new regulated power and water assets in China, Middle East and Africa. May be interested in Jimah and Genco assets. Closer to home, there is a possibility that YTLP will bid for 1,400MW coal-fired Jimah Power plant. The Jimah plant is scheduled for commissioning in 2009 and there are talks the owner may be interested to dispose some stake in Jimah. In addition, Genco Singapore, a Temasek-owned company, plans to sell three of Singapore’s largest generating assets, estimated to be worth more than S$2b each. Genco Senoko Power (3,300MW), Power Seraya (3,100MW) and Tuas Power (2,670MW) together account for more than 80% of Singapore’s generating capacity. It was reported that the sale process commenced in 2007 and will be completed in end-08 or early 2009 with no foreign ownership cap. Apart from YTLP, there are numerous competitors such as Singaporean companies - SembCorp, Kepcorp and CitySpring Infrastructure Trust - as well as foreign players like Hong Kong’s CLP Power, Japanese groups like Tokyo Electric Power (Tepco) and Petronas, that are said to be involved in the bids for Genco’s assets
Company Focus YTL Power
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(iii) Second round of PPA negotiation in Malaysia not detrimental to valuation YTLP accounts for 5% of Malaysia’s national grid capacity. YTLP is the first independent power producer in Malaysia with two gas fired combined cycle power plants and combined capacity of 1,212MW at Paka Terengganu (404MW) and Pasir Gudang, Johor (808 MW). YTLP’s Paka and Pasir Gudang plants have combined capacity of 1,212MW, or approximately 12% of total IPP capacity and 5% of the national grid’s installed capacity, compared to IPP’s total generation capacity of 43% in Malaysia (refer to Fig. 3). Potential extension of PPAs in Malaysia. We understand that Malaysia Energy Ministry and Tenaga Nasional Bhd (TNB) have begun fresh talks with independent power producers to review power purchase pacts after an earlier round of talks failed. The last round of talk with IPPs was on potential cut in capacity payment to partially compensate for the fuel cost hike. However, the talks were not successful due to agreed terms in the PPA. For this round, we believe that the negotiation is likely to focus on the sweetener, i.e. extension of PPAs beyond the original expiry period, in exchange for reduced capacity payments (refer to Fig.4). Key concern on PPA extension focuses on tariff rates and returns. The key concerns for IPPs under the second round of PPA talk will be on the new tariff rates and the returns on additional capex for the upgrade of the power plants. We believe that the discussion is likely to be a long drawn issue and unlikely to be finalised in the near term. We expect minimal impact on YTLP earnings and DCF valuation since local generation assets (Paka and Pasir Gudang) account for only 23% and 22% of FY08-09 EBIT. Fig.3: YTLP accounts for 5% of national grid capacity
(iv) YTLP’s valuations yet to reflect the UK water sector re-rating Improving asset quality. YTLP acquired Wessex from Enron for £1.24b in year 2002 when it was ranked No.8 among the UK Water and Sewerage Companies. The value has been enhanced with top quality management and a successful efficiency improvement programme. Wessex Water achieved No.1 ranking in 2005-06 and received one of the highest allowable increases in water and sewerage charges of 25% for the 2005-2010 review period. Based on Wessex’s 2007 annual report, the regulatory capital value (RCV) of Wessex Water increased 8.4% p.a. to £1,987m for 2006/07. RCV is the value of the Wessex business and approved by the UK office of Water Services (Ofwat) and forms the basis upon which prices are set. The next tariff review for Wessex will be carried in end 2009 for the new rates from 2010-2015. Growing interest in regulated asset The value of water regulated assets in UK has been on the up trend since late 2006 (refer to Fig.5). A benchmark on valuation was set in October 2007 when a group of investors led by JP Morgan agreed to buy Southern Water from Royal Bank of Scotland for an enterprise value of £4.2b, valuing Southern Water at EV/RAB of 1.44x. Using the same 1.44x RAB benchmark for Wessex, YTL’s stake is worth RM19.7b. We believe that there is scope for YTLP to unlock value from Wessex Water given the rising EV/RAB values. Fig.5: Recent M&A in UK water sector
Date Assets Acquirer Premium to RAB Oct 06 South East Water Hasting Funds Management 35% Dec 06 Thames Water Kemble Water Ltd 36% Oct 07 Southern JP Morgan Chase 44%
Source: Various sources Potential unlocking of asset value? YTLP valuations are not fully reflecting the UK water sector’s re-rating. We estimate Wessex Water’s implied value is about 1.2x RAB, against the benchmark valuation of 1.4x, possibly due to YTLP’s listing in Malaysia. We believe at some point the significance of YTLP’s exposure to the UK water sector should take precedence over the issues in the domestic IPPs given Wessex’s 74% contribution to YTLP’s FY07 EBIT. While we understand that YTLP is not planning to sell down its stake in Wessex in the near term, we cannot discount the possibility of the company doing so, if a lucrative offer is presented at a later stage. (v) Bright prospects for water-related jobs in Malaysia More local water projects to be awarded soon. The water sector in Malaysia is taking a major step forward with the government taking over the assets from the various states. This implies that capex spending going forward will be borne by the federal government. The state entities will continue to operate the water assets, but, there are plans that should involve private sector collaboration. YTL Group may be bidding for RM10b Pahang-Selangor water transfer project. The press reported that a consortium comprising UEM World Bhd, a member of the YTL group, and parties linked to the Pahang royalty is believed to have joined the race for a slice of the RM10b Pahang-Selangor interstate water project. It is understood that the consortium has put in a bid for the job, which will include the construction of a 45km pipeline through the Titiwangsa mountain range to transport raw water from Pahang to Selangor. Given the need to improve the water distribution system and the ongoing negotiation on water asset transfer, we expect more water projects to be awarded in 2008. Leverage on Wessex water expertise. Wessex Water’s water and sewerage water expertise clearly comes in handy for YTL Group to bid for local water projects. We understand that YTL Corp will be involved in the construction part of the job while the water-related concession and management aspects will be handled by YTLP, if YTL Group wins any of the new water projects. As it is, Wessex Water is already providing technical expertise with regards to YTL’s recently secured river cleaning job, estimated at RM1b.
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(vi) More capital management on the cards? Cash dividend policy of 20% and share distribution. YTLP’s various businesses generate steady cash flow which enables the company to pay out attractive dividend every year. YTLP has consistently paid out dividends in two forms: - a cash dividend policy of 20% of net profits with minimum gross DPS of 10.0 sen per share, and (ii) share dividend from its share buyback programme. Aggressive share buyback programme. Since the last announced date for 1-for-25 share distribution on 16 Nov 07, YTLP has accumulated in total 67.7m shares at between RM2.48-RM2.83 per share from its aggressive share buyback programme (refer to Fig.6). We estimate that YTLP requires 220m shares for the next 1-for-25 share distribution, and YTLP has accumulated 68m shares over the last two months, implying that the next round of similar 1-for-25 share distribution is on the cards. Given the improving cashflow from its water and power assets, we expect YTLP to maintain net dividend per share of 11.2 sen for FY08-09, with potential share distribution from its share buyback programme. Fig 6: Summary of YTLP’s share buyback since 17 November 2007
Higher FY07 dividend. For FY07, YTLP has declared two tax exempt dividends of 3.75 sen per share, together with final gross dividend of 5 sen. This translates to attractive net dividend yields of 4.5%, against 3.6% for FY06. YTLP also recently completed a 1-for-25 share distribution on 7 Jan 08 (refer to Fig.7). The combined FY07 net dividend yield based on share price of RM2.50 amounts to 21.2 sen (11.2 sen + 10.0 sen) or net yield of 8.5%. Fig.7: Growing dividend with share distribution
FY03 FY04 FY05 FY06 FY07 Cash div (sen) 10.0 10.0 10.0 10.0 11.2 Net div yield (%) @RM2.50 4.0 4.0 4.0 4.0 4.5 Distribution 1-for-50 1-for-25 - 1-for-25 1-for-25 Net yield from distribution @RM2.50
2.0 4.0 4.0 4.0
Total net yield (%) 6.0 8.0 4.0 8.0 8.5 Source: Company
Company Focus YTL Power
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Valuation • We initiate coverage on YTLP with a Buy recommendation and SOP-derived target price of RM3.00/share. Our SOP valuation values YTLP’s Wessex investment at RM17.8b based on 1.4x 2006/07 RAB of £1,987. We have applied 1.2x RAB valuation for YTLP’s 35% investment in ElectraNet based on management indicative RAB of A$1b. As for PT Jawa and Malaysian IPPs, we value them using DCF valuation based on WACC of 14% and 9% respectively.
• Our SOP valuation assumes full conversion of 2000/2010 warrants but we have yet to factor in any dilution impact from the proposed 2.2m new warrants which was announced on 16 Nov 07.
• Apart from capital upside of 19%, YTLP also offers attractive net dividend yield of up to 8.5%. YTLP has declared net dividend of 11.2 sen per share and a 1-for-25 share distribution for 2007. The combined FY07 net dividend yield based on share price of RM2.50 amounts to 21.2 sen or net yield of 8.5%. Given the improving cashflow from its water and power assets, we expect YTLP to maintain net dividend per share of 11.2 sen for FY08-09, with potential share distribution from its share buyback programme. The group’s aggressive share buyback programme over the last two months is also a good indication that the share distribution for 2008 is on the cards.
• YTLP is one of the few companies listed on the Bursa Malaysia that has demonstrated a steady yield and commendable growth. YTL Power’s acquisitions over the last five years including Wessex Water, Jawa Power and Electranet, resulted in commendable FY05-07 net profit CAGR of 28%. YTLP has also declared average net dividend yields of 8.3% over the past two years, thanks to a combination of cash and share distribution in specie.
• We believe YTL Power is well poised for further value-accretive acquisitions of regulated assets in the region given its gross cash of RM6b. We envisage reduced competition especially from private equity firms, particularly when the subprime crisis is raising required rate of returns. Apart from its expansion in Indonesia, other potential new assets under consideration are new water concessions in Malaysia and Genco’s asset in Singapore. There is also scope for YTL Power to leverage on Wessex Water’s expertise to gain entry into Malaysia’s water concessions business. YTLP has recently proposed to raise RM2.2b bond to refinance existing debts and to fund potential new acquisition.
Fig 8: YTLP’s sum of parts
Stak
e RCV Value SOP/shr Remarks (%) RMm RMm RM
Wessex Water, UK 100.0 12,716.
8 17,803.5 3.35 Assuming RM6.40/£ and 1.4x RCV ElectraNet, South Australia 35.0 2,900.0 3,480.0 0.65 Assuming RM2.90/A$ and 1.2x RCV
DCF for Jawa Power, Indonesia 35.0 1,272.5 0.24 Based on WACC of 13.7% (Ke-18%, Kd- 13%)
DCF for Paka and P.Gudang IPP 100.0 3,427.8 0.65 Based on WACC of 9.1% (Ke-10.2%, Kd- 4%)
Other investments 614.4 0.12 Based on 8x FY07 PER Cash from warrant conversion 1,236.8 0.23 Net cash/(debt) (8,025.2) SOP 19,809.8 FD shares capital (m)* 6,683.9 SOP per share (RM) 2.96
Source: Company, DBS Vickers * assumes full conversion of 2000/2010 warrants
Company Focus YTL Power
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Fig 9: YTLP’s regional peer comparison
Company Currency Mkt Cap
(US$) PE (x) FY08
PE (x) FY09
ROE (%)
Div Yield (%)
YTL Power International MYR 4142.44 15.4 15.2 21.4 4.5% Tenaga Nasional MYR 11931.91 10.6 10.0 18.7 3.0% MMC Energy MYR 4047.59 17.1 14.8 9.9 0.8% American Electric Power Co USD 17048.26 13.4 12.5 10.8 3.5% Tata Power INR 6718.54 40.5 36.3 14.0 0.8% Kansai JPY 22883.10 23.8 17.7 8.1 2.3% Chubu Electric JPY 19240.05 21.7 19.1 5.3 2.3% Lanco Infratech INR 2844.43 28.8 18.4 23.0 0.0% GVK Power & Infrastructure INR 2188.17 57.1 44.0 8.8 0.4% CLP Holdings HKD 18571.28 13.9 13.8 18.6 4.0% Contact Energy NZD 3294.41 19.0 16.9 8.8 3.7% GD Power Development CNY 5792.04 28.3 23.2 11.9 0.7% Hongkong Electric Holdings HKD 11628.99 12.9 12.4 16.0 4.4% Korea Electric Power (Kepco) KRW 25479.51 11.0 9.7 4.9 2.7% Shenergy Company Limited CNY 6461.54 24.4 21.4 16.6 2.0% Shenyang Jinshan Energy CNY 820.75 25.3 17.9 9.2 0.1% Sichuan Chuantou Energy CNY 2134.39 86.9 62.6 6.5 0.0% Xinjiang Tianfu Thermoele CNY 1675.22 56.8 39.4 4.8 0.4% Tokyo Electric Power JPY 33790.30 -66.2 81.6 10.3 2.6% First Philippine Holdings PHP 816.33 8.0 7.6 26.7 3.5% Average 22.8 25.2 12.3 1.9%
Source:, DBS Vickers, Bloomberg
Fig 10: Segmental breakdown of YTL
FY Dec (m) 06 07 08F 09F 10F 11F
Revenue
Water & sewerage 2368.74 2649.10 2556.05 2665.23 2763.08 2865.09
Power generation 1160.62 1127.57 1156.53 1164.57 1164.57 1164.57
Appendix SWOT Analysis Strengths Weakness • Good earnings visibility with stable concession earnings • Proven earnings enhancing acquisitions • Commendable track record in improving asset values
• Limited growth due to stable nature of regulated assets • Exposure to currency fluctuation risk
Opportunities Threats • Cost saving from efficiency improvement in managing regulated assets • Potential acquisition of new regulated assets given its gross cash of RM6b • Leveraging on Wessex’s expertise to bid for water concession and other related services in Malaysia • River cleaning jobs in Malaysia
• Potential unfavourable changes from PPA negotiation for Malaysia power assets. We believe that the negotiation is likely to be favourable to IPPs, given the agreed terms in PPA.
Source: DBS Vickers
Fig.11 YTLP’s Corporate structure
Source: Company Fig. 12: Key Management Team
Board of Directors Designations Tan Sri Dato’ Seri (Dr) Yeoh Tiong Lay Executive Chairman Tan Sri Dato’ (Dr) Francis Yeoh Sock Ping Managing Director Dato’ Yeoh Seok Kian Deputy Managing Director Tan Sri Datuk Dr. Aris Bin Osman @Othman Director Tan Sri Dato’ Lau Yin Pin Director Dato’ (Dr) Yahya Bin Ismail Director Mej Jen (B) Dato’ Haron Bin Mohd Taib Director Dato’ Yeoh Soo Min Director Dato’ Yeoh Seok Hong Director Dato’ Micheal Yeoh Sock Sing Director Dato’ Yeoh Soo Keng Director Dato’ Mark Yeoh Seok Kah Director Syed Abdullah Bin Syed Abd. Kadir Director
Source: Company
YTL CORP
YTL Power and Utilities
YTL Power Generation
Wessex Water
Jawa Power
ElectraNet SA
Malaysia United Kingdom Indonesia Australia
100% 100% 35% 33.5%
60%
Company Focus YTL Power
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Income Statement (RM m) Balance Sheet (RM m)
FY Jun 2007A 2008F 2009F 2010F FY Jun 2007A 2008F 2009F 2010F
Source: Company, DBS Vickers *due to deferred tax adjustment in FY07
Company Focus YTL Power
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This document is published by HWANGDBS Vickers Research Sdn Bhd (“HDBSVR”) (formerly known as Hwang-DBS Vickers Research Sdn Bhd), a subsidiary of HWANGDBS Investment Bank Berhad (“HDBS”) (formerly known as Hwang-DBS Securities Berhad) and an associate of DBS Vickers Securities Holdings Pte Ltd (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. HDBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBS Vickers Securities Holdings Pte Ltd is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. HDBSVR, HDBS, DBSVH, DBS Bank Ltd, and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other banking services for these companies. HDBSVR, HDBS, DBSVH, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc (“DBSVUSA”), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. HDBSVR, HDBS, DBSVH, DBS Bank Ltd and/or other affiliates of DBSVUSA may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
Wong Ming Tek, Head of Research
Published and Printed by HWANGDBS Vickers Research Sdn Bhd (128540 U)
(formerly known as Hwang-DBS Vickers Research Sdn Bhd) Suite 26-03, 26th Floor Menara Keck Seng, 203, Jalan Bukit Bintang, 55100 Kuala Lumpur, Malaysia.
Refer to important disclosures at the end of this report.
Wired Daily Previous day’s action: Malaysia Market Roundup
Index Performance High Low Volatility (pts) Close Chg (pts) Chg (%) KLCI 1394.41 1382.41 12.00 1388.50 7.96 0.6 FBM30 9162.08 9062.75 99.33 9117.58 54.83 0.6 FBM Emas 9464.53 9375.10 89.43 9430.57 55.47 0.6 FBM Second Board 6552.82 6449.87 102.95 6552.82 102.95 1.6 FBM Mesdaq 5788.03 5687.99 100.04 5740.64 25.09 0.4 Leading KLCI Movers Lagging KLCI Movers Close (RM) Chg (%) Index point Close (RM) Chg (%) Index point RHB Capital 5.50 7.8 1.59 Sime Darby 11.60 -2.5 -3.34 Public Bank 11.30 1.8 1.31 Petronas Gas 10.40 -1.9 -0.73 Astro 3.70 8.8 1.07 YTL Corp 7.55 -1.9 -0.46 Trading Activity Market Breadth Previous 2 days 5-day mov Previous 2 days day before average day before Volume (m units) 787.4 727.2 1139.9 Gainers: 463 168 Value (RMm) 1454.6 1395.0 2432.1 Losers: 301 665 Avg price/unit(RM) 1.85 1.92 2.13 Unchanged: 259 186 Top gainers (by %) over the past 5 market days Top 5 losers (by %) over the past 5 market days Close (RM) Chg (%) Close (RM) Chg (%) Silver Bird 1.00 44.9 Nikko Electronic 0.22 -37.7 Microlink Solution 0.40 33.3 mTouche Tech 0.51 -34.0 Formis Resources 0.75 32.7 Binaik Equity 0.67 -30.9 MMS Ventures 0.25 22.5 Key West Global 0.09 -26.1 FACB Industries 0.85 21.4 Vitrox Corp 0.65 -24.6 KLCI Futures Currencies & Commodities
Close Previous Chg (%) Close Previous Chg (%) day day Spot month 1385.00 1383.50 0.1 RM per 1 USD 3.24 3.24 -0.1 Feb-08 1383.00 1384.00 -0.1 RM per 1 Euro 4.78 4.79 -0.2 Mar-08 1380.00 1383.50 -0.3 RM per 100 Yen 3.02 3.03 -0.3 Jun-08 1369.50 1375.00 -0.4 CPO 3-mth fwd (RM/t) 3,200 3,150 1.6 Crude Oil (US$/b) 95.49 94.94 0.6
Today's Market Preview
The benchmark Kuala Lumpur Composite Index or KLCI on our Malaysian bourse will likely stage another attempt to challenge the 1,400 resistance level today. With speculation of general election getting hotter by the day and against a backdrop of stable overseas performances, we reckon bargain hunters may be tempted to come in and provide short-term market support. Overnight, key equity bellwethers on Wall Street extended their recoveries, adding between 0.3% and 0.8% at the closing bell. While there was disappointment on the absence of fresh details on the proposed US$150b economic stimulus package in the State of the Union address by the U.S. President, investors are looking forward to an interest rate cut by the policy-makers later tonight to boost confidence in the economy as well as the financial markets.
30 Jan 2008
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Wired Daily
Off-market Transactions on Bursa Malaysia (Top 10 Trades by Volume)
29-Jan-2008 Volume (units) Value (RM) Average Types price (RM)
Sealink Sdn Bhd t.b.a. t.b.a. t.b.a. t.b.a. t.b.a. 2008 Sarawak-based shipbuilderBright Focus t.b.a. t.b.a. 104.0m - Main t.b.a. Infrastructure construction.Hartalega Holdings t.b.a. t.b.a. t.b.a. t.b.a. Main t.b.a. Gloves manufacturer.JCY Holdings t.b.a. t.b.a. t.b.a. t.b.a. Main t.b.a. Manufacturer of hard disk
components.Mainfield Corp t.b.a. RM1.05 22.0m 41.0m Main t.b.a. Road maintenance unit of
Bumi Highway Bhd.
^ Retail price is subject to a refund in the event that the final retail price is less than RM0.40. The final retail price will equal the institutional price, which will be determined by way of bookbuilding.
t.b.a. – to be advised
3 of 4
Wired Daily
Regional Markets Snapshot Substantial Shareholders’ Transactions* Indices Close as at % chg vs. 52-wk 52-wk YTD
This document is published by HWANGDBS Vickers Research Sdn Bhd (“HDBSVR”) (formerly known as Hwang-DBS Vickers Research Sdn Bhd), a subsidiary of HWANGDBS Investment Bank Berhad (“HDBS”) (formerly known as Hwang-DBS Securities Berhad) and an associate of DBS Vickers Securities Holdings Pte Ltd (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. HDBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBS Vickers Securities Holdings Pte Ltd is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. HDBSVR, HDBS, DBSVH, DBS Bank Ltd, and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other banking services for these companies. HDBSVR, HDBS, DBSVH, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc (“DBSVUSA”), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. HDBSVR, HDBS, DBSVH, DBS Bank Ltd and/or other affiliates of DBSVUSA may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
Wong Ming Tek, Head of Research
Published and Printed by HWANGDBS Vickers Research Sdn Bhd (128540 U)
(formerly known as Hwang-DBS Vickers Research Sdn Bhd) Suite 26-03, 26th Floor Menara Keck Seng, 203, Jalan Bukit Bintang, 55100 Kuala Lumpur, Malaysia.
