YTL Power has got the power

Written by The Edge Financial Daily

Friday, 01 April 2011 12:08

YTL Power International Bhd (March 31, RM2.30 Initiate coverage at RM2.29 with buy call and target price RM2.70: We initiate coverage on YTL Power International (YTLP) with a “buy” call and RM2.70 target price. We like its portfolio of steady concession businesses. While we are positive on Yes, YTL Communications’ new 4G mobile Internet service, we expect it to incur start-up losses. That said, we postulate YTLP cash flows are strong enough to maintain net dividend per share (DPS) at 13.1 sen or a 5.7% net dividend yield. More M&A may beckon. YTLP has interests in power generation in three countries (YTL Power Generation in Malaysia, Power Seraya in Singapore and 35%-owned Jawa Power in Indonesia), power transmission in Australia (33.5%-owned Electranet), water and sewerage services in the UK (Wessex Water), telecommunications in Malaysia (60%-owned YTL Communications) and a nascent oil shale joint venture in Jordan (30%-owned). Its power generation assets are multi-fuels (oil, gas and coal) and it operates under different power purchasing agreement (PPA) models (take or pay, liberalised market, and capacity and energy payment), where the skill sets are rare in any independent power producer (IPP) company. Wessex Water is the best water and sewerage company in the UK. YTL Communications’ YES garnered 100,000 subscribers in just 105 days. We estimate FY11 group core net profit to be 10% lower year-on-year on YTL Communications’ start-up losses. Ex-YTL Communications, we estimate 7% compound annual rowth rate over the next three years on steady earnings growth at Power Seraya and Wessex Water. We believe the 50% lower quarter-on-quarter net DPS in 2QFY11 was due to RM1 billion in debt repaid. Based on our cash flow projections, YTLP can maintain FY10 net DPS of 13.1 sen in current FY11 and the next few years. We initiate coverage with a “buy” call and RM2.70 target price (TP). Our sum-of-parts (SOP) TP is largely discounted cash flow-based. Re-rating catalysts are: (i) resumption of quarterly 3.75 sen net DPS; (ii) lower than expected losses at YTL Communications; and (iii) M&A — recall that YTLP was one of two last bidders for the 300MW to 450MW Bibiyana gas IPP in Bangladesh in October 2010. YTLP is likely not done with M&A just yet. —Maybank IB Research, March 31

Changing risks profile for YTL Power

Recent investment moves by YTL Power International (RM2.27) appear to underscore the company’s gradual diversification from the power generation and water utility business.

The company launched its high-speed WiMAX broadband services nationwide in November 2010 with some fanfare. This was followed by a joint-venture announcement for an oil shale-cum-power generation project in Jordan, in which it will take a 30% stake.

Whilst the latest ventures may yet offer exciting growth prospects over the longer-term, they also alter the company’s risk profile. Specifically, YTL Power was widely viewed as a defensive investment. This may no longer be the case.
Although the company’s oil trading arm — housed under Singapore-based Power Seraya — has contributed to some earnings gyrations over the past few quarters, earnings from its power generating and water utility businesses were, by and large, fairly predictable.

Steady cash flow from these investments, in turn, support a relatively generous dividend policy, giving investors higher-than-market average yields. But the high upfront investments required for the new ventures may dent the company’s dividend payout going forward.
YTL Power announced a lower second interim dividend of 1.875 sen per share in conjunction with its 2QFY11 earnings results, half of the 3.75 sen per share paid in the previous corresponding quarter.

YTL Power's mobile broadband service under Yes are expected to be loss-making for a number of years.

Despite the cutback, we still assume the company to maintain its total dividends of 13.125 sen per share for the full-year — on the basis of its strong balance sheet. YTL Power has gross cash totalling almost RM8.1 billion at end-December 2010, although net debt stands at about RM13.6 billion. Nevertheless, we do not discount the possibility of reduced dividends, as the new ventures will be a drain on resources, at least in the initial stages.

Perhaps more significantly, they also inject a higher degree to risks and volatility to the company’s earnings profile. With sketchy details on the new ventures unveiled to the investing community, thus far, earnings visibility has become more opaque.

Yes will be loss-making for several years

For starters, it is a given that the mobile broadband services — under the Yes brand name — will be loss-making for a number of years. Losses in 1QFY11 totalled RM7.9 million, rising to RM19.8 million in 2QFY11 following its nationwide launch in November.

We expect losses for the broadband arm to trim YTL Power’s overall earnings for the current financial year. Net profit is estimated at RM1.13 billion, down from RM1.21 billion in FY10. Based on our FY11 earnings forecast, YTL Power shares are currently trading at fully diluted P/E of roughly 15.1 times, which is more or less in line with the broader market’s average valuations.

Continued losses from its broadband unit will also cap earnings growth, at least for the next two to three years. Thus, upside gains for the stock may be limited for some time, although its dividends — net yield estimated at 5.8% — should still appeal to yield-seeking investors.

Intense competition in mobile broadband

YTL has reportedly spent some RM1.5 billion in rolling out its broadband services to-date, out of the estimated RM2.5 billion planned for the network coverage to reach 85% of the population.

Yes offers a novel “pay as you use” tariff structure, subject to a minimum RM30 per month for both voice and data, which favours customers with low usage. Based on the average mobile broadband user’s data consumption of between 1.5-3GB, its rates are fairly comparable to those currently offered by the cellular operators.

Nevertheless we are somewhat ambivalent on the company’s subscriber acquisition success in the intensely competitive mobile broadband market, currently dominated by Celcom, Maxis and DiGi — despite initial, positive anecdotal review on its services.

The cellular operators have the advantage in being able to bundle mobile broadband packages with the voice services of existing customers. Maxis, for instance, offers its subscribers promotional rates for add-on broadband services. Although Yes also offers voice services, the lack of WiMAX-enabled handsets is a major handicap. At the moment, the company has available only one Samsung handset model for subscribers.

As part of its strategy, YTL is planning to offer free broadband services to more than 400,000 students in 20 public universities and select private institutions in the country by end-2011. Earlier this year, the company successfully activated its network in the main campus of University Sains Malaysia in Penang. We expect the company will leverage on this customer base to upsell its services in the future.

Still substantial capex to be spent

Looking further ahead, we believe YTL’s competitiveness will improve when all the operators migrate to the next generation platform, called the LTE.
Supported by the expected robust ecosystem, Yes should better appeal to potential customers, particularly with its plans for quad play — to offer ubiquitous broadband, video and voice services. (Spectrum for rollout of 4G LTE services will be available for use in 2013).

The company inked a license and service agreement with US-based Sezmi Corporation to deploy hybrid TV — comprising of traditional, live over-the-air broadcast as well as over-the-top on-demand online content — in Malaysia and Asia Pacific late-last year. It plans to launch the service in the domestic market by end-2011, at a suggested investment cost of between RM1 billion to RM2 billion.

Success remains to be seen

For the moment though, it is far too soon to tell how YTL will fare in its broadband venture. Similarly, the oil shale project in Jordan is expected to be a long-term investment.

The project is led by Eestia Energia, the national energy company of Estonia, through its 65% stake in the joint-venture. EE was awarded an oil shale concession by the Jordanian government in May 2010. Construction of the oil plant, with output of some 38,000 barrels per day, will commence after the environmental studies are completed.

The venture company will also construct and operate a 900MW oil shale-fired power plant. The energy generated will be sold to the national utility company, Nepco under a long-term power purchase agreement. The oil and power plants — estimated to cost some US$5 billion (RM15.3 billion) — are likely to commence operation post-2015.

A quick recap

YTL Power owns and operates the country’s first independent power generating plants, which were commissioned back in 1994. In 2002, the company extended its reach beyond local shores by acquiring Wessex Water — a UK-based sewerage and water operator supplying 1.2 million customers.

Two years later, it bought a 35% stake in Jawa Power, an independent power producer with a 1,220 MW coal-fired plant in East Java, Indonesia. And in 2009, YTL Power acquired Power Seraya, a Singapore-based power generator and wholesale-retail utility company.

YTL Comms to launch Android phones in June

YTL Comms to launch Android phones in June
By B.K. SIDHU

It sells nearly 7,000 WiMAX-enabled handsets in 3 days

KUALA LUMPUR: In just three days YTL Communications Bhd (YTL Comms) has managed to sell nearly 7,000 units of its first two WiMAX-enabled handsets and in June it will launch the next-generation smartphones running on the Android platform, said executive chairman Tan Sri Francis Yeoh.
WiMAX-enabled handphones are limited in supply but since Friday two new models, Yes Buzz and Yes Zoom, were made available, priced at RM488 and RM399 respectively. These devices can be integrated seamlessly with other Yes 4G devices with a single Yes ID.
Since the launch of its Yes service in November, YTL Comms has drawn more than 100,000 active users to its network. According to Yeoh, the next target segment is the over 400,000 students in the country.
“We are telling them (the students) to taste the power of 4G. A lot of people (only) know the power of (our network when they get onto our network). Every month we are getting more and more users on our network.

Tan Sri Francis Yeoh holding the latest Yes Buzz handphone. He says the next target segment for YTL Comms is the over 400,000 students in the country.


“Once on our network, you can download movies at a very fast speed, listen to Stanford University education content on Stanford on iTunes at very affordable rates, and even use the mobile video chat, FaceTime on iPhone 4.
“FaceTime allows an incredible amount of versatility with this video-conferencing tool and when you are on Yes, there is no issue of throttling or buffering,''' he told StarBiz in an interview.
Yeoh said that even migrant workers were using Yes and not just for voice calls; they use chat and video transfer and find “our nine sen per minute pricing very affordable.”
“They are emailing pictures back to their country and this is a shift we have not seen before. This goes to show that multimedia is here,'' he said.
The nine sen pay-as-you-go service is for 3MB (megabytes) of data, a one-minute voice call or one SMS.
On Friday, the company launched two Yes Valuepacks, priced at RM68 and RM150 a month, which offer 3.5GB and 10GB of data usage respectively. On top of mobile data, users get to make 250 minutes of voice calls and send 250 text messages a month.
The Yes Buzz is a mobile phone that doubles as a mobile Internet device which can connect to the Yes network, allowing users to browse the Internet on top of making voice calls and sending text messages.
YTL Comms' WiMAX network covers 60% of the populated areas and by year-end, it will be 80%. The company is investing RM2.5bil in the venture. Yeoh declined to say when the company will break even but a source said, “we reckon it would take about two years.''
Asked how many users are able to use the network without it getting congested, Yeoh said: “Our network can cater to 15 million users without us putting in more investments.''
So the challenge for the company going forward is to get as many users as it can to use its network since it has a lot of capacity to offer.
“People are buzzing on the Buzz; something is surely happening with nine sen a minute,'' he said.
Asked about market share, Yeoh said: “We believe our share of mobile Internet is 100%. No (player) has nationwide (coverage) for mobile Internet as we have and you can go to any part of the North-South Expressway and still get our service.''
Analysts tracking the sector are unable to give exact wireless broadband numbers, nor is the data updated on the regulator's website.
But going by mobile users, Maxis Bhd had 12.9 million users at the end of last year, Celcom Axiata Bhd, 11.2 million and DiGi.Com Bhd, 8.7 million.
By market share, analysts' data point to Maxis having about 40%, Celcom, 33%, DiGi.Com, 26%, and U Mobile, 0.7%. The balance is shared by others including mobile virtual network operators.
Thus far Yes 4G has carried over one million minutes of voice calls, 670,000 SMSes and over 104 terabytes of data traffic. Of the 100,000 active subscribers, Yeoh said there was an equal number with huddle and dongles.