YTL Power lacks earnings driver
Business & Markets 2014
Written by Affin IB Research
Friday, 10 January 2014 10:21
YTL Power International Bhd
(Jan 9, RM1.86)
Maintain add at RM1.85 with a target price of RM2: The group, we opine, is at the tail end of a heavy capital expenditure (capex) cycle for its YES 4G telecommunications division. We estimate that it has ploughed in almost RM2.1 billion to build its YES network and infrastructure (predominantly for the set up of base stations, hardware and research and development works).
Together with the award of the 1BestariNet project by the government (to wire up 10,000 schools), we believe management is well leveraged to focus on average revenue per user (ARPU) trajectory — estimated at RM50 to RM60 at this juncture.
We understand that almost all 10,000 schools in Peninsular Malaysia are already connected to the group’s 4G network, based on 85% connectivity within Peninsular Malaysia via 4,400 base stations.
In our earnings projections, we pencilled in an active subscriber base of 400,000 (current subscriber base is approximately 450,000, although this may be a case of both active and inactive subscriber base) and a capex of RM2.5 billion over the course of the delivery of the YES network (since 2010).
Progressively, revenue per available room enhancement should help narrow the divisional pre-tax loss of RM270 million in the financial year ended June 30, 2013 (FY13). That said, we do not expect this division to break even in the next two years as competition among telecommunications players within the 4G arena is intensifying. Thus, we project an organic, street-centric revised three-year earnings compound annual growth rate of 4% over FY13 to FY16. Wholly-owned Singapore unit YTL PowerSeraya Pte Ltd continues to be the main earnings anchor — accounting for 74% and 54% of FY13 revenue and profit before tax respectively.
We understand that competition within Singapore’s electricity generation market is tight with the commissioning of Island Power’s 2,000mw power plant (adding capacity by 20%). Thus, we lowered PowerSeraya’s earnings to capture heightened demand-side risk. This results in a 3% to 12% downgrade in FY13 to FY16 earnings per share.
While we have downgraded earnings, we have raised the underlying stronger foreign currency (Singapore dollar, Australia dollar and British pound) to reflect current spot rates. As a result, our target price remains unchanged at RM2 per share, based on a 10% discount to our revised net asset value (RNAV) of RM2.24 per share. Maintain “add”. We will revisit the stock in the presence of stronger economic recovery in Singapore, meaningful mergers and acquisitions (M&A) and a more active capital management.
Naturally, a key upside to our projections will be earnings accretive M&A, including bidding for Track 3B 2,000mw greenfield coal-fired power plant. The project winner is expected to be announced in the first quarter of 2014. If YTL Power is successful, we estimate Track 3B could add 4% to our RNAV of RM2.24 per share (to RM2.33 per share), based on a derived internal rate of return of 10%. Key downside risks are recession, unscheduled maintenance shutdowns and a sharp spike in interest rates. — Affin IB Research, Jan 9