YTL Power 2014 forecast

I revisited my initial post on YTLP back in Jan 2013, in it I forecasted 2013 profit to be 1.33B, it came in at 1.33B.

For 2014, I've forecasted a slightly lower adjusted profit of 1.28B and with the lower share count, the adjusted EPS is forecasted to be 0.19cent.

Based on historical Y/E PE range of 9.2 to 11.28, the expected price range would be 1.75 to 2.14. The industry segment PE according to reuters is 15.88, giving a share price of 3.01.  

Based on hsitorical trading range of 10x-16x PE, YTLP's share is worth RM1.9 to RM3.04

YTLP Q1 2014

Summary: YTLP announced a rather ordinary set of result with a 60M drop in profit due to a rather mystifying bunch of impairment. 43M impairment in receivable and 24M impairment in investment in associate. There is no detail on these impairment.


YTLP announced its Q1 result on 21 Nov 2013.

I still LOVE the strength of its operating cashflow and free cashflow! Instead of spending it on on dividend, they have been buying back their shares - ceteris paribus, this is awesome for its warrant holder.

Ok, back to the current result.

Overall the group result is down by about 60M compared quarter to quarter. This is mainly due to the decline in the merchant and investment holding segment offset by an improvement in the water & sewerage segment. The IPP and mobile broadband segment shows marginal improvement in its result.

Power Generation

Improvement is due to increase volume. IPP contract will expire soon, hence expect contribution to tail off in 2017.

Merchant

The merchant segment experienced a decrease in revenue and a corresponding drop in profit. With the intensifying of competition in the Singapore electricity market the margin is also suffering.

Water & Sewerage

Rate was allowed to increase by 6% from April 2012, but I believe the recent strength could also be due to the appreciation in GBP to 5.2 from about 4.8.

Mobile
More customer, less losses. LTE implementation is rather simple for its network, its rollout could be a major boost.

Investment holding
This is the most interesting part of the result, with a 100M loss for the quarter.

Impairment in associate is only 24M. However there's a 43M in receivable impairment and 14M in inventory obsolescence. There's no further detail on this impairment of receivable.

These are YTLP's associate per their annual report. The mobile division is considered a subsidiary.

I don't know what's the detail relating to the impairment and the lack of transparency on this rather material figure is not great.

The valuation for the company is still rather undemanding, sentiment for the company may improve if they successfully bid for the IPP contract but its contribution is likely to be minimal given the size of the current YTLP's offshore business.

YTLP-WB

On the 23rd September I posted a recommendation to add YTLP-WB to your portfolio.

It traded at 51.5 cent that day.

Today I've just disposed off some of my YTLP-WB at 80.5 cent.

In the 2 month period since my recommendation, YTLP-WB have risen 29 cents or 57%.

I will still retain the vast majority of my WB at this stage. I believe the valuation for YTLP is undemanding given its resilient cashflow and the strong buyback being executed by the management.

If you are holding onto some WB, I suggest you take some profit at this stage - the upcoming earning announcement might take some air out of its recent momentum.

YTLP - update from 23 September

In the 2 weeks since my last post on 23 September on YTLP buyback, they company have been continuing its rather aggressive buyback program.

As of 7th October, the company have cumulative treasury share of 218,103,045 shares - with its latest buyback at price between 1.80-1.82.

This represent an increase of 126,582,500 shares from my last update 2 weeks ago. Assuming an average price of 1.75, this buyback is worth approximately RM220million.

All in 14 days.


YTLP-WB is trading at 0.56 and YTLP is trading at 1.82.

YTLP buyback update

Since my last post on YTLP's buyback program back in May, something interesting have just occurred.

On the 28th August 2013, they cancelled a total of 250,000,000 treasury shares, while retaining 9,005,945 shares in treasury.

Based on my last post, they had a total of 137M treasury shares as of 9th May, giving a net buyback of around 122M shares in 4 months period. Using an average share price of around $1.60, this buyback is worth over RM200M.

"On 9/5/2013 - the company have approximately 137,324,245 treasury share outstanding representing approximately 1.86% of the total outstanding share."

Since then, the company have continued with their buyback program. As of today - they have a net cumulative treasury shares of 91,520,545 shares representing a net buyback of 82M in this month alone. This buyback is worth approximately RM135M using an average share price of $1.60.

Cumulatively since March 2013, the company have bought back approximately RM452M worth of its own shares. 

Tan Sri Francis Yeoh have repeatedly mentioned that YTLP is undervalued - this latest move is an affirmation of his view. For long term investor - buying a blue chip company with resilient cash-flow at price close to its 9 years can't really go wrong - in my opinion.

If you have available cash, I suggest you add this to your portfolio.

However, rather than going straight into its shares - consider YTLP-WB, its conversion price is RM1.21 and a long tenure (2018).

YTLP-WB is trading at 0.515, YTLP is trading at 1.77

YTLP buyback -update

Following my last post on YTLP buyback, the company have continued to be active in the market to buyback its share.

Its cumulative net outstanding treasury share as of 30 May 2013 is 166,347,745 shares.

On 9/5/2013 - the company have approximately 137,324,245 treasury share outstanding representing approximately 1.86% of the total outstanding share.

This represent an additional buyback of 29,023,500 shares from the open market. Assuming at an average price of RM1.51, the buyback is worth RM43,825,485 this month.

Today's announcement.

YTLP's 4G push - a perspective from its CEO.

Great article in The Edge today shedding some light on the 4G's push by YTLP.

Basically the rollout delay is a calculated one due to limited ecosystem for devices operating in the 2.6Ghz spectrum (iPhone operate on 1.8gHz spectrum).

China and India have indicated that they will operate on the 2.6gHz spectrum but they have not started auctioning the spectrum.

Interestingly the CEO was quoted to have said that they are ready to deploy LTE on its WiMAX network. My hope as an investor is that their WiMax network is LTE ready without another round of heavy capital expenditure.

YTL Power - buyback mode worth RM116million since March 2013.

Over the past 3 months, I've not actively kept track of my holding in YTLP. With the election fever in the past months, the stock have not been terribly active.

However, having looked at the counter earlier today, I notice substantial share repurchase by the company since 4 March 2013.

On 4/3/2013 - the company have approximately 56,725,145 treasury share outstanding representing approximately 0.8% of total outstanding share.

On 9/5/2013 - the company have approximately 137,324,245 treasury share outstanding representing approximately 1.86% of the total outstanding share.

This represent a net purchase of approximately 80,599,100 shares. Assuming an average purchase price of 1.45 - this represent a buyback worth RM116,868,695. 

I view this development as a very positive move for minority shareholder as it will increase EPS assuming no change in operating environment.

The company generate > RM2b in operational cashflow annually. They can certainly afford to buy back more shares at this price. 

YTL Corp Berhad - Massive buyback program

Summary: YTL share price have been well supported through a massive share buyback program amounting to over RM600 million over the past 12 months. 

However underlying earning have also improved, primarily due to favourable results in its Cement segment. Quarterly earnings at YTLC increased by approximately 41% or RM 50 mil. 

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YTL Corp's share have been on a tear lately. The price shot up from its trading range of around RM 1.4 to RM1.6 to eventually trade above RM 2 before currently trading at RM1.80. Representing an appreciation of almost 29% (40 cents up from 1.40).

It's currently trading at approximately 12x forward PE (based on annualised Q1 earning) or 15x historic PE. 

If you review their P&L, you won't find anything extraordinary to warrant these price movement I reckon.. net income went up from 1.03B to 1.18B - roughly a 10% increase.

Its EPS and DPS figure shows improvement but is it really the cause of the appreciation??

EPS went up from 0.11 to 0.12 cents in last 12 months - about 9% increase. 

YTL Cement

Since their delisting in April 2012 after privatisation, the YTL Cement unit have achieved a 41% jump in quarterly profit. I wonder what would the price be if they were still traded. This result announcement was around June/August 2012.. YTL's price declined from RM2 since this result announcement.

 Based on current quarter earning, Net income is 392M or EPS @ .04 (.16 annualised) - approximately 33% increase from prior year's EPS of 0.12.

Based on segmented result at 30/Sept 2012 - it seems that the biggest contribution to the net income increase is YTL Cement and management service. 

MASSIVE buybacks

In the past month alone YTL repurchased approximately 15.4M shares amounting to approximately RM 29M through share buybacks.

Since January 2012 - their total buybacks amount to 361,850,700 units. 

(Looking at 15 Jan 2012 buyback announcement and 16 Jan 2013 buyback announcement - taking into consideration distribution of treasury shares in July 2012 of 647M shares)

The cash outflow from buybacks is pretty significant, in FY 2012 they spent over RM 500 M in buybacks. More than on distribution of dividends.

Given that they have continued repurchasing shares since its financial year end, I would estimate the total amount spent on repurchase of shares to exceed RM 600 M. Given that the share price movement does not track the result announcement, I would assume this massive buyback is the primary cause of the price increase. 

Implication?

YTLP's price is depressed due to a massive supply of discounted WB granted by YTL. If an attempt to privatise YTLP through shareswap as claimed by many analyst, then the minority shareholder of YTLP would be giving up share in a depressed YTLP (with potential catalyst) for a share that's trading 30% higher than its trading range on the back of a massive share buyback scheme. 

YTLP - debt, leverage and natural hedging

Summary: High gearing for foreign denominated assets reduced FOREX risk through natural hedging of forex risk, reduces overall asset portfolio risk.

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YTLP has approximately RM23 B of debt as at June 2012 (up front RM21B) in June 2011. Bulk of this increase is due to capital spending at Wessex Water and Yes of approximately RM1.6B and RM897M respectively.

The Wessex capital spending is due to their  £1B investment plan between 2010-2015. I am not sure what's the ROI for these investment given the declining segmental profit since 2010.

Debt as natural hedge in oversea investment
Anyway, the bulk of the borrowings lies in Power Seraya and Wessex Water. These borrowing represent approximately RM16B or 69% of total borrowing as at June 2012.

These debt represent 77% and 91% of asset in Power Seraya and Wessex Water.

As highlighted in the past by the management, YTL seek to hedge its FX exposure through foreign denominated borrowing that correspond to the underlying asset currency.

Hence, I think its FX borrowing (at rather low effective rate) acts as a efficient risk management strategy and given the secured nature of the underlying cashflow - investors should not be too worry about its level of gearing.

Illustration

Currently GBP/MYR is approximately 4.8, it's approximately 6.2 back in 2009 - representing a weakening of 22.5% over 4 years. 

Assets held under Wessex water was RM11.5B as at June 2011 or approximately GBP2.4B.

GBP2.4B @6.2 = RM14.9B

Representing a devaluation of approximately RM3.35B in asset value.

HOWEVER - due to "natural hedging" in the form of GBP denominated debt, the debt has also devalued by 22.5% - reducing the devaluation loss to approximately RM336M.

Saved the shareholder RM3B due to this "high gearing".

Note: Actual figure will differ - but concept is accurate.

YTL Power - 2012 shareholding change in review.

EXECUTIVE SUMMARY

• YTL + family cumulatively disposed of 233M warrants (WB) and 24.4 M shares of YTL Power in the period between March to July 2012.
• EPF's net disposal for the year since March 2012 is approximately 13.5M shares, this pale in comparison.
• Large amount of discounted warrant (733M was offered for sale) traded since Oct has continued to weigh on the price of YTLP since trading.
• Share price has recently show some strength, coincidentally showing purchase by a director's spouse.

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During the past 12 months, YTLP declined from RM1.86 before hitting a trough of RM 1.50 (18/12/12) before recently rebounding past RM 1.60. I have been bullish on the fundamental of YTLP since 2011 and have sat through the volatility in the past 12 months.

Since my last post, I've had the opportunity to digest various market observer's comment on the price decline of YTLP - thanks for the food for thoughts.

Case against Privatisation

Given the privatisation of YTL Cement earlier this year through a share swap and Francis Yeoh's repeated broadcast of his desire to privatise YTLP, I was suspicious about a possibility of a similar privatisation through share swap involving YTLP.

However, Felicity has pointed out a very obvious fact that it is unlikely for YTL to dispose off the warrant into the market then buying it back within a short period. Yeah, they are not stupid people.

It was interesting looking at the analysis after the fact.

Price movement vs Shareholding movement

Firstly, let me apologise for the indicators on my graph - if anyone have a suggestion for a software for Mac to do a better job in editing the graph - I am all ears!

I've extracted some raw shareholding change information here.

Looking at the information extracted a few events was notable to me:

• Event A - Francis Yeoh disposed off 21 Millions share in YTLP @ approximately RM 1.83

• Event B - Between 26/3/2012 to 21/5/2012 - YTL Corp disposed off a total of 231,526,365 YTLP-WB at price range of approximately RM0.63 to RM 0.39. 

• Event C - Short rebound, director and spouse disposed off 3,393,541 YTLP shares and 1,450,000 WB
• Event D - 18 Sept, offer for sale to YTL shareholder WB of YTL at RM 0.20 (61% discount to 5dwa). (Initial announcement on proposal made May 29)
• Event E - Trading of YTL post WB entitlement, reaching a support of RM1.50.

Other notable event?

- There was notice of various grants of options in August with acceptance date of option in June.

- A spouse of director has recently began acquiring YTLP shares at around RM 1.53- RM 1.59, after disposing the same share in June/July for around RM 1.76-RM1.80.

- Total disposal by EPF between 1 March 2012 to 31/12/2012 is 13,459,400 shares in YTLP. This pale in comparison with the 24 million shares and 233 million WB disposed off by YTL and family.

Conclusion

- There was an unusually large amount of disposal of warrants/share by YTL+family in the first half of 2012 that led to decline in YTLP shares/WB price.

- Subsequent to entitlement of discounted warrant by YTL shareholder on 2 Oct 2012, price of its mother share continued to decline before finding a support @ RM1.50.

- Insider has began acquiring YTLP shares at approximately RM 1.53 - RM1.59 after disposing it earlier.

Note (joke): To me the fact that a spouse of a director acquiring the share of YTLP seems to be a very Malaysia specific buy signal. (After assessing the fundamental).

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)

Jordan Oil Shale Project

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.