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Tuesday, October 22, 2013

YTL Power International - Share Buybacks Yet Again…


Risk-reward remains uncompelling. The share price rally in Sep-Oct 2013 (+18%) has been driven by the company’s aggressive share buybacks. The intent behind such aggression is unclear, but share buybacks (and subsequent cancelation) is a way for parent YTL Corp to raise its stake in YTLP. Nevertheless, with share price having exceeded our RNAV estimate, we view the risk-reward as being uncompelling. Maintain HOLD, with a higher target price of MYR1.84.

Aggressively share buybacks. Share buybacks previously only occurred at a price below MYR1.60. Beginning Sep 2013, the pace of buybacks has quickened, with price seemingly taking a backseat (share price is up 18% since end-Aug). Share buybacks in Sep-Oct 2013 totaled 294m shares, compared to 207m during Mar-Aug 2013. Buybacks have on average, accounted for 70% of daily volumes.

YTL Corp effectively raising its YTLP stake. YTLP cancelled 250m shares in Aug 2013, meaning parent YTL Corp’s stake in YTLP has increased from 51% to 53%. Should YTLP cancel its existing treasury shares (308m), YTL Corp’s stake in YTLP would rise further to 55%. This is in line with parent YTL Corp’s desire to raise its YTLP stake to 70% by 2014.

Conditions not ripe for a share swap. YTLP has outperformed parent YTL Corp by 42% YTD, meaning a share swap at present would be more dilutive for the Yeoh family. A privitisation offer is hence unlikely in the near term. The swap ratio (YTL Corp / YTLP share price) is at its 18-month low, which means that YTL Corp is a better proposition for proponents of the privatization, in our view.

Raising target price to MYR1.84 (from MYR1.75). We no longer attach a discount (10% previously) to our sum-of-parts, but now value the stock on a fully-diluted basis (to account for the unexercised warrants). Each operating entity is valued using DCF. Our target price implies a PER of 14.4x and P/B of 1.3x in FY14.

Source: Maybank Research - 22 Oct 2013

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