Friday 4 January 2013

YTL Power - value share or value trap?

Executive Summary
- The management of YTL have a great track record in earning accretive acquisition. 
- The conservation of cash is to fund growth or reduce debt
- Share is trading at a lower band of historical valuation
- Short Term pressure on price in last few months due to reduction of dividend and sale of discounted warrant likely to ease.
- Francis Yeoh thinks YTLP is undervalued and is looking to privatise it

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YTL Power's share price performance has been dismal for the last 12 months, its current price is comparable to those during the 2009 GFC. Is this valuation justified or is the share undervalued?? Is it a value share or a value trap?




Looking at the segmental level one can see that there is a considerable drag on their recent earning. In the FY ending June 2012, total loss attributable to the telecommunication startup is over RM 300 million. 

Taking their most recent Q1 result and extrapolating an annualised figure to estimate their annualised earning for 2013. My expectation is for YTL Power to report an earning of approximately RM 1.3B or 0.18 cents.

A copy of the segmented spreadsheet is available here.

Based on historical Y/E PE range of 9.2 to 11.28, the expected price range would be 1.66 to 2.03. The industry segment PE according to reuters is 14.31, giving a share price of 2.58.  

Based on hsitorical trading range of 10x-16x PE, YTLP's share is worth RM1.8 to RM2.88

A) Factor contributing to price decline

i) STARTUP LOSSES AT YES

As highlighted above, the operational loss attributableYTL Yes contribute to a loss of RM 307 M in the financial year ended June 2012. As of the most recent quarter the loss is RM 61 million (cf. RM 90million+ loss in Q1 2012)

Based on reduction in current quarter loss, I expect the loss attributable to the telco segment to reduce to RM 242 M compared to RM 307 M in the previous year (based on a conservative annualised Q1 loss)

Bestarinet - RM 4.5 billion award

Looking at the revenue increase for the YES segment, one can imply an increase in take-up for the product by the end user. The boost offered to the segment by the 1Bestarinet contract valued at RM 4.5 billion is also expected to help cushion against losses in this segment.


LTE?

Other catalyst for the reduction of loss in this segment could be the implementation of LTE on YTL's network. Currently YTL operates its YES network on the WIMAX spectrum. In the technology war for the 4th Generation network, it appears that WIMAX is losing. The biggest supporter of WIMAX is Sprint Nextel, and they are getting rid of WiMax and switching everything over to LTE. 

Francis Yeoh has conceded the willingness of Yes to roll out the LTE network. Based on other quotes attributable to YES' management, it appear that their is ready for LTE too. P1, whose network operates on WIMAX, demonstrated a live Wimax-LTE TDD network to media during a demonstration in April 2011. YTL operates with the same technology on the same spectrum.

Based on my understanding, the demonstration by P1 illustrate that it is possible based on current technology to have both LTE and WIMAX on the LTE TDD spectrum currently utilised by YTLP. This technology will allow switching between WIMAX and LTE just like current switch between EDGE and 3G.

Hence the current early adoption of Wimax by YTL won't impede their ability to later transition to LTE  (technology being adopted by Digi, Maxis and Celcom) but would rather allow them to switch their LTE network on at a time when they have coverage competitive with the major telco.

Currently Maxis and Digi have an approximate market capitalisation of RM 52 Billion and RM 41 Billion respectively. YTL Power have a market cap of RM 12 B. Ponder on that.

(Yes, Greenpacket have a measly market cap of RM 318 million. But they don't have the financial strength to built up a network that's competitive to the major telco and I think YTL's track record in executing engineering job shows that they have proven execution history.

It is not that unthinkable that with a competitive network, YTLP will gain a sizeable slice of the telco pie from the incumbent thereby creating a new cashflow stream for shareholder willing to invest in this growth story.

The current discount to YTLP's valuation due to the start-up loss will not continue indefinitely. On a worst case scenario, YTLP can discontinue its telco network (thereby stopping the operational losses) and sell its asset (including mobile spectrum). 

ii) DIVIDEND PAYOUT REDUCTION

Dividend has been reduced  to 0.9375 cents/share (3.75 cents annualised) in its latest quarter from a 4 year historical average (2008-2011) of 12.69 cents (based on financial highlight extracted from its annual report above).

Based on historical financial statement and analyst forecast, it is not disputed that YTLP's stable of asset has a track record in cash generation ability. The reduced dividend payout is a management decision and not forced upon them by their inability to generate cash.


Currently YTLP despite its investment into YES, managed to increase its cash pile to over RM 10 Billion (as at Sept 2012). Analyst believe that the management is conserving the cash for more M&A opportunity

As outsider, we are unable to ascertain what is the true intention of the management in conserving the cash. 

However,  YTLP was previously known to be a reliable dividend counter, having changed its payout outlook, investor with preference for dividend yielding stock would have been abandoning the stock in drove, further contributing to the price decline. 

However, for investors with a longer time horizon and a growth focus. The conservation of cash by YTLP for M&A is a positive growth signal given their track record for earning accretive acquisition.

Potential target for cash utilisation by YTLP? - (purely speculative)

In Dec 2010, YTLP announced a JV with Eesti Energia of Jordan to jointly develop an oil shale project in Jordan. The total project cost is US$5 billion and YTLP have a 30% stake in the JV

The total exploration and production rights under this concession agreement gives a 40+10 years exploration and production right to 2.3 billion tons of oil shale. 

There don't seem to be much update on this Jordanian project since but based on the information available on the partner's website it appear that the project is ongoing. The first operational phase of the project will be a Oil Shale Fired Power Plant for 460W to be operational by 2016 - see recent news

YES
Already ongoing, but yet the cash pile is growing.

Train to Singapore?
Long shot. YTL have been dreaming about this rapid train service since 2006. A preliminary costing of RM 8 billion was then provided by YTL. It has been reported that a feasibility study is being conducted by SPAD and the report will be submitted to the government in Q1 2013.

No guarantee that the project will be given the green light and even if it does whether YTLP will have a position in the consortium to develop the project. However given the closer G2G relationship between Singapore and Malaysia in recent time, it is certainly possible and since YTL have a proven track record in managing/executing the ERL project - they will be given a seat on the project.

iii) SALE OF WARRANT TO YTL SHAREHOLDER @ RM 0.20 (RM1.21 CONVERSION PRICE)

- In the 3 months prior to the announcement of warrant entitlement, YTLP shares was trading at a range between RM 1.70  to RM1.82. 
- On 18 Sept 2013 YTL announced an offer to sell up to 733,079,172 warrants in YTLP to its existing shareholder at a 61% discount to the 5 days weighted average market price of RM 0.513. 
- The entitlement date is 2 October 2012.
- In the 3 months since grant of warrant to YTL's shareholder, the share price of YTLP fell to a low of RM1.50 finding support. 
- The conversion price of the warrant is RM1.21 on a 1:1 ratio. 
- The sudden supply of discounted warrant will place a downward pressure on the price of its mother share even without any change in its operational outlook. 


IV) INDEPENDENT POWER PRODUCER EXPIRY

The PPA is likely to expire in 2015. So far, YTLP has been unsuccessful in its bid for any of the new PPA and even if it succeed, the terms are likely to be less favourable than it is now. 

Based on my 2013 earning estimate of RM 200 million, the discontinued earning from the PPA in 2015 is likely to be offset by reduction in losses by the telco segment. 

B) Potential catalyst?

Other than those highlighted in discussion above (reduce losses from YES, Jordan, M&A), another obvious catalyst for YTLP would be its exposure to GBP. 

Revisiting the segmented earning result above, it would have been clear that Wessex concession's earning contribution has been declining over the last few years (approximately 20%). At the same time GBP has fallen from 35% since 2008.


CONCLUSION

- The management of YTL have a great track record in earning accretive acquisition. 
- The conservation of cash is to fund growth or reduce debt
- Share is trading at a lower band of historical valuation
- Short Term pressure on price in last few months due to reduction of dividend and sale of discounted warrant likely to ease.
- Francis Yeoh thinks YTLP is undervalued and is looking to privatise it - 

News Report - 1, 2,

My personal opinion is that YTLP is very cheap by historical standard. It has got proven execution record, earning accretive acquisition, strong/consistent cashflow generation ability. Its current market cap of RM12 Billion is extremely undemanding!

Given Yes' potential to be a full fledge telco, it should be given a higher PE given its growth potential.

If I were a conspiracy theorist, I would believe the reduction in dividend and the flooding of cheap warrants is an attempt by the management to push lower the price to allow for a cheaper privatisation! However, given the religious nature of its management, I would doubt they will resort to such unethical tactic to defraud the average retail investor.


14 comments:

  1. This comment has been removed by the author.

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  2. EPF is selling YTLP and picking up YTL, that why the price keep going down, but in longer term, it should recover. WB will be an attractive entry, since the Yeoh's family will own about 412 Million of the WB at 20 cents now.

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  3. Hi Chin - Thanks for your comment/feedback. Please look at my latest posting. The total EPF disposal between March 2012- Dec 2012 is approx 13.5 M shares. This pale in comparison with YTL+family's transacted volume of 24 M and 233 M shares and warrants respectively.

    I would think that the market mover lately would have been YTL rather than EPF.

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  4. There is news from investment bank that YTL Power is in the midst to sell off its local power plant to 1MDB.

    Based on 1212MW, fixed assets: 990m and profit 250m, the selling price could be worth RM 5-6b.

    The amount is derive from mixed formula: RM 4.6m/MW; 20x PE and 5.8x fixed power asset est RM990m.

    The above parameter is based on last year 1MDB acquire Genting Sanyen.

    Conservatively,lets assume the power plant sell at RM5b, YTL Power should be able to recognized around RM4b net gain, translate to increment of 55sen/share.

    YTL Power could then opt for special dividend or capital repayment via par value reduction from 50sen to 10sen.

    From the rationale point of view, it make sense for YTLP to sell power plant to 1MDB. Gas subsidy is always political issue. Also, Msia is now facing rising power demand,and make no sense for IPP to dismantle their plant after concession with government expire

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  5. Logically IPP should be worth something and your estimation based on 1mdb transaction seems fair.

    If it happens, it will be a catalyst to the value.

    But epf is selling down its stake, I assume they will know if it's in the works.

    For the purpose of my piece I've ignored the potential but you are right. I should revisit it as a potential catalyst.

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  6. I think capital repayment require Court approval.

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  7. About EPF selling listed company stake, i don't think there is any logical to justify that as EPF also like retail investor, sell stock despite share trading at lowest point, but will keep buyout whenever share is trading at high level.

    If YTL Power opt for special dividend payment, the payout will be a lot faster and no require shareholder approval. However, if YTL Power opt capital repayment via reduction par value from current 50sen to 10sen, it will have to seek shareholder approval during EGM and high court approval, take at least 4-6 month time

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  8. To build new power plant, it cost a lot more and take at least 4year to complete. It make sense to utilize existing power plant to continue generate power as YTLP have excellent record in maintenance and upgrading it power generator. According to its annual report, YTLP have replace its paka power station with newly installed latest model, the most efficient HR3 Burners in all its Gas turbines. Overall plant availability keep at optimal level with 95.15% at Paka Power Station and 99.05% at Pasir Gudang Power Station. The combined power production by both station was 102.81% of the scheduled qualities.

    Therefore, despite the concessionaire is going to expire in 2 year time, its power plant still able to keep continue generating power supply. Therefore, it make sense for IMDB to acquire these power assets even have to pay full value for it as the readily available power plant will shorten time to rebuild and get rid of risk of execution.

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  9. @Hng - Thanks for taking the time to comment.

    I think institutional shareholder in Malaysia tend to have better information than the general retail lot. That's just my perception, I don't have hard evidence to prove it. I just reckon with big holding such as YTLP, the investment team will have a better grasp on the pulse of the market than the rest of us mere mortal. Having a stake in EPF's success through my monthly contribution, I certainly hope these lot know what they are doing.

    Selling YTLP @ current level seems silly.

    - I disagree that it capital reduction will be a probable route in the event that YTLP come into a windfall. There's not much logic behind it, I think their retained profit have sufficient credit if they want to do a decent payout. No need to go through the hassle of capital reduction. Usually that's done for restructuring purpose..

    - Yeah, sound logic for a use of current plants. Whether it happen or not is another question. My conservative base case is no renewal with asset to be sold at book value to winning bidder.

    Recall back in Oct 2012, their IPP contract was not part of the parcel of IPP renewed, unlike Genting's. For there to be a purchase of their plant - it must come with a secured bankable cashflow for 1MDB. Renewal is a prereq for disposal.

    It's often pointed out that YTL is close to BN. But the question I wonder is whether they are closer than Malakoff or 1MDB. Relationship is probably different now under current (and future) administration.

    The main point of my piece is that IPP non-renewal is irrelevant to YTLP as most of their earning is from oversea (unlike 10 years back), their diversified earning cashflow is secured and only the subject of normal business risk, not to political whim and fancy. I love the 10x cashflow it offers, would buy more of the share if only the corporate governance is better.

    If something happens on the IPP front, the price should POP, but if it doesn't I don't see much of a problem.

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  10. 1BestariNet is a project initiated by the Malaysian Ministry of Education (MoE) and carried out in partnership with YTL Communications. Under the project, 10,000 primary and secondary public schools in Malaysia will be equipped with high-speed 4G Internet access and a virtual learning platform, providing fast and reliable Internet connectivity as well as access to a world-class Integrated Learning Solution known as The Frog VLE.

    In today sinchew newspaper, YTL Power claim there is already more than 10m Yes ID available in all school, offering 5m students, 4.5m parents and 0.5m teacher all integrated under virtual learning platform (VLE) and will be able to access The Frog VLE for free on Yes Network under the MOE 1BestariNet initiative, but will cost 2.5sen/MB if to surf the internet

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  11. Market watcher

    IMDB acquire Genting sanyen before its granted extension. The renewal concessionaire only announce after the deal concluded. Thus, If 1MDB buy YTLP power plant, its just matter of time, it will grant extension, 1MDB is wholly own by Gov,

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  12. Recall Franchis Yeoh claim that Yes need at least 100,000 subscriber to breakeven. It only need 0.1% of total 10m 1Bestarinet Yes 1D opt for data plan (2.5sen/MB) to surf internet, Yes wimax already can profiting.

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  13. http://www.theedgemalaysia.com/contact-us/197026-yeoh-expects-ytl-comms-to-turn-around.html

    The article quoted him as saying the breakeven number is 1M - regardless, 1Bestari offered a nice boost to the revenue bit of the business. Hopefully, the business can turnaround sooner.

    Re 1MDB, yes the announcement on renewal was post-announcement, but basically everything is opaque - can't see what will happen. It's irrelevant in my analysis, but will be a welcomed upside. Won't speculate on it though.

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  14. Sorry, i quoted wrongly, Yes need at least 1000,000 (1m) subscriber to breakeven. So, it need to attract 10% of total 10m 1Bestarinet Yes 1D opt for data plan (2.5sen/MB) to surf internet to turnaround wimax.

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