Resilient earnings & attractive yield

Resilient earnings & attractive yield

DBS Group Research

BUY RM2.45 KLCI : 1,250.41
Price Target : 12-Month RM 3.00
Reason for Report : Company update
Potential Catalyst: Acquisition of new regulated assets, potential new water projects and higher dividend payout

Story: We understand that negotiations on the power purchase agreement (PPA) have not resumed after the general election. And if they do, we believe it would be on new tariff rates, and returns on additional capex for upgrading the power plants upon expiry of the existing concession. In any case, impact on local IPPs and resultant impact on YTLP’s earnings is expected to be minimal since they account for only 23% and 22% of group FY08F and FY09F EBIT. With full cost pass-through for its Malaysian and Indonesian power plants, the issue of higher fuel costs is virtually non-existent for these operations.

Point: We believe YTLP will continue to seek new acquisitions given its gross cash of RM7.6b as at 1H08. It recently proposed a RM2.2b convertible bond issue to refinance exiting facilities and to help fund potential new acquisitions. We envisage less competition for regulated assets as the subprime crisis has raised required rates of returns significantly.

Relevance: We favor YTLP for its defensive utility-type earnings and attractive 8.6% net yield based on sustainable net cash dividend yield of 4.6%, and potential 1-for-25 share distribution that provides 4% net yield. YTLP also enjoys stable earnings and agreed rate of returns for Wessex and Electranet operations in UK and Australia. Maintain Buy with SOP-derived target price of RM3.00.