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Thursday, September 18, 2014

PPA extension a rerating catalyst for YTL Power

Source: http://www.theedgemalaysia.com/business-news/307813-ppa-extension-a-rerating-catalyst-for-ytl-power.html

YTL Power International Bhd
(Sept 17, RM1.57)
Maintain buy with target price of RM1.84: *We believe YTL Power’s 10 sen
dividend per share (DPS) for financial year 2014 ended June 30 (FY14) is
sustainable into FY15 and FY17, given our annual free cash flow forecast
(FCF) of RM403 million to RM566 million over FY15 to FY17. And, if
boosted by RM150 million to RM165 million in dividend contributions from
the group’s associates, it will imply an “all-in” free cash flow of
around RM550 million to RM730 million (eight sen to 11 sen per share).

The Edge weekly reported recently that a total of 3,000 megawatts (mw)
of coal-fired capacity being built by Malakoff Corp Bhd and 1Malaysia
Development Bhd could be delayed, putting the national grid in a
possible power crunch position around 2016.

To overcome this shortage, the Energy Commission has the option of
extending expiring power purchase agreements (PPAs) with its independent
power producers.

We opine that YTL Power is set to benefit from the delay in the
completion of Malakoff’s new plant. With YTL Power’s current 1,200mw
PPAs expiring in September 2015, extending the agreeements would be a
natural choice for the country if it wants to maintain the 2016 to 2017
reserve margin at above 20% to 25%.

We think there is a good chance of a PPA extension for YTL Power and,
hence, we now factor in a five-year extension to the group’s PPAs
(versus no extension previously). Our forecasts factor in annual capital
expenditure of RM1.5 billion, broadly in line with YTL Power’s
historical spend of RM1.3 billion to RM1.6 billion.

We also raise our revised net asset value (RNAV) and 12-month target
price for YTL Power to RM1.84 from RM1.70 based on an unchanged 10%
discount to RNAV.

We continue to like the group for its attractive valuation of 11.5 times
of calendar year 2015 (CY15) earnings per share (EPS). Its FY15 to FY17
net dividend yield of 6.4% is attractive and sustainable, in our view.

Rerating catalysts include PPA extension and a higher dividend payout.
Risks include unplanned power outages, lower-than-expected DPS payout,
failure to extend PPAs and deterioration in Singapore-based Power Seraya
Ltd’s operating environment.

YTL Power had declared a surprise 10 sen dividend when it announced its
FY14 results at the end of August — the market was expecting a token DPS
of between 0.9 sen and four sen. Investors responded positively and YTL
Power’s share price has since appreciated by 9%.

While some investors still doubt the sustainability of YTL Power’s 10
sen payout, our analysis indicates otherwise. Also, we sense the
company’s willingness to distribute more dividends going forward based
on the fact that its shares were previously viewed by the market as a
dividend stock, with an annual DPS of nine sen to 13 sen.

Meanwhile, The Economic Times of India has reported that YTL Power’s
parent YTL Corp Bhd is in talks with India-based NSL Group to acquire up
to a 49% stake in NSL Orissa Power, which is setting up a 1,320mw
coal-fired power plant in Orissa’s Angul district. Although there are
significant regulatory, cost and construction risks, we believe YTL’s
expertise and experience in investing in overseas infrastructure
projects will be helpful. Assuming YTL Power is the acquiring vehicle,
we believe the Orissa power plant will be earnings-accretive in the long
term. — Affin Investment Bank, Sept 17


YTL

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