YTL Power risk-reward not compelling



By Maybank Investment Research

Rating: Hold

Target Price: RM1.70

DOWNGRADE to “hold”.

YTL Power International Bhd’s share price has appreciated by 11% year-to-date, and is now above our target price.

We no longer view the risk-reward as compelling, and hence downgrade the stock from “buy” to “hold”.

Our target price of RM1.70 is unchanged.

The privatisation (by share swap) angle remains plausible, but the risk-reward has now shifted in favour of parent YTL Corp (not rated), in our view.

Parent YTL Corp is open to raising its YTL Power stake to 70% (presently 51%) in the next calendar year.

However, YTL Power has outperformed parent YTL Corp by 24% year-to-date, meaning a share swap at present would be more dilutive for the Yeoh family.

The swap ratio (YTL Corp / YTL Power share price) is at its 12-month low, which means that YTL Corp is a better proposition for proponents of the privatisation story, in our view.

The share buy-backs have stopped since the share price exceeded RM1.60 on 9 July.

In total, the company has bought back 182 million shares from March to July 2013, at an average cost of MYR1.51 per share.

This brings total treasury shares to 239 million shares, representing 3% of the share base. Should these shares be cancelled in future, YTL Corp’s stake in YTLP would rise to 53%.

Operational headwinds. We do not expect YTLP’s share price to be boosted by positive earnings surprises.

The group faces operational headwinds: 1) the competitive landscape in Singapore could intensify, resulting in margin pressure (PowerSeraya accounts for 62% of financial year 2014 profit before tax), the pound could depreciate against the ringgit, having appreciated 7% since May 2013 (Wessex accounts for 48% of financial year 2014 profit before tax). Target price unchanged at MYR1.70.

Our target price of MYR1.70 is based on a 10% discount to our real net asset value estimate of MYR1.89, in turn derived from a sum-of-parts with each operating entity valued using discounted cashflow.

Our target price implies a price to earnings of 12.0 times and price to book of 1.1 times in financial year 2014.