YTL Power International Bhd
(Feb 21, RM1.89)
Maintain buy with downgraded target price RM2.20 from RM2.50: YTL Power will release its 2QFY12 results tomorrow.

We expect its annualised 2QFY12 earnings to fall below expectations at RM1 billion to RM1.2 billion, accounting for less than 80% of both our and consensus full-year forecasts respectively.

We expect its YES WiMAX business to continue to drag on its earnings. This will be cushioned partly by positive earnings contribution from its PowerSeraya Ltd independent power producer (IPP) and Wessex Water.

Given the lack of policy clarity from YTL Power, we reckon its decision on a lower dividend payout was to prepare the group with the necessary cash hoard for its recent business ventures, YES WiMAX and the Jordan oil shale project, or other potential M&A if there are bargains to be found.

There are a few potential M&A candidates — water companies in the UK and power concessions in Indonesia — for YTL Power to explore.

Hence, we revise lower our FY12F/FY13F dividends to 7.5 sen each, translating to a net yield of 4% which is lower than its historical net yield of 5% to 7%.

Taking a cue from its previous actions, there is a possibility that YTL Power will announce another interim dividend in 2QFY12. We expect a lower dividend per share of 1.88 sen or a flat rate of 3.75% similar to 2QFY11.

YTL Power, via its subsidiary YTL Communications, has been awarded a 1 Bestarinet project worth RM4.5 billion.

The contract is for a five-year period, with an option to extend for another five plus five years, totalling 15 years.

The project involves providing Internet access and a virtual learning platform for 9,924 schools starting January 2012.

We believe this project will not be earnings accretive in the near term, but we expect it to enhance YTL Communications’ profitability over the longer term via larger recurring revenues arising from a growing subscriber base as YES brand awareness improves.

However, we expect YES WiMAX will continue to be a drag on YTL Power’s earnings for the next three years during its gestation period.

We gather that the feasibility study of the project is yet to be completed. It will be a long wait before this business venture will take off. — MIDF Research, Feb 21

This article appeared in The Edge Financial Daily, February 22, 2012.