Friday, May 4, 2012

Is YTL Power running out of ideas?

Buying into YTL Power feels like playing into the game of monopoly. Playing monopoly, you will want to own all the utilities and railroads. YTL Power owns a multitude of utilities businesses except for railroads. Well, YTL, the group does have rail ambitions in connecting Singapore and Malaysia with high-speed train besides partly owning ERL.

Although YTL Power has RM7.5 billion cash in its books, it should not be considered cash rich. Why?

Just look at the 4 segments of businesses under YTL Power:
  • Power generation - mainly under YTL Power Corporation in Malaysia, Jawa Power in Indonesia and a 33.5% stake in Electranet, a 200 years concession in Australia.
  • Water Utilities - under Wessex Water which it purchased from Enron.
  • Multi Utilities business under Power Seraya which YTL Power bought from Temasek in 2009. Power Seraya is involved in wholesaling, retailing and also into trading of fuel oil;
  • Telecommunication - under the 60% owned YTL Communications which operates the YES wimax business.
Problem of venturing into these businesses is that they are capex heavy. A lot of times, the businesses require heavy initial investments. You can see that all the above businesses require heavy reinvestments one way or another. Its Malaysian IPP concession will end in 2015. So is the Wessex Water's concession - by 2014 (see below note on the water concession). Ending of the concessions may not mean the end of the business, but it probably signals the end of its monopolistic benefits.

YTL Power's multitude of revenue and profit contribution
You would expect YTL to be buying assets in times like this due to opportunities arises from crisis. Look at the opportunity it took when buying Wessex Water from Enron in 2002. The purchase of Power Seraya in 2009 for SGD3.8 billion and its venture into the punitive Wimax business in Malaysia however probably halted YTL Power's continuous big M&A ambitions as those ventures probably drained out the group's liquidity. Although the group may have some RM7.5 billion in cash, it is also heavily geared with RM13 billion debt.

If you look at the above segmental information, it has a decent 20% contribution from the power generation business where substantially is contributed from the generous Malaysian IPP concession. YTL Power however cannot rely on that much longer as the concession is ending in 2015. Whether it is to be continued, I am sure the pricing would not be as generous as the current rates and terms it enjoys. With that, YTL Power has to build its cash position. As a result, we continuously see it lowering its dividends as per below chart.

In telecommunication, I expect the "YES" business will not carry YTL Power anywhere as the business it is trying to build on is very very tough with much bigger competitors. Although they did try to introduce a different business model, I do not see much can be done with having that different model. A communication highway is a communication highway. Whoever wins will be from those that can either own both the downstream and upstream business (TM) or those that have scale (TM, Axiata, Maxis, Digi). I do not see YES having that scale. On top of that, with LTE coming on stream, WIMAX does not carry any advantage anymore for YTL as a wireless broadband player.
YTL Power's 5 years performance - notice the reducing dividend per share which shows that the company is shoring up its liquid assets to compete in anticipation of ending concessions and tougher competition

On the other hand, if you look at the businesses that YTL Power already owns, its Wessex Water and Power Seraya are the more efficient utilities players. With those, it may not look at expansion via acquisitions but more so into project bidding, pitching on being a more efficient player with know-how and technologies.

Would you however bet on it?

Note: On Wessex Water

 Water Act 1989 (England and Wales)

In 1989, the Regional Water Authorities were sold by issuing shares on the stock market, with special discounts being offered to the public to ensure political success. Under the Water Act 1989, the newly-floated water-and-sewerage companies (WaSCs) became owners of the entire water infrastructure and properties of the RWAs. The Act gave them 25-year concessions for sanitation and water supply, protected against any possibility of competition. The concessions covered the whole of England and Wales, with the exception that 25% of the population continued to have their water (but not sewerage) supplied by the existing small private companies, now known as water-only companies or WoCs.

Concessions may be terminated by the government,but only by giving 25 years’ notice (extended from 10 years in 2002).


Value Guy said...

Where did you get the information for the end dates of YTL Power's concessions?


felicity said...

It is a 21 year concession which commenced on 1 Oct 1994 and ends on 30 Sep 2015. And if you remember, the lopsided IPP was probably due to a nationwide blackout in 1992.

YTLP investor said...

Wessex Water is a concession in perpetuity.

YTLPI owns a 100% stake in Wessex Water, one of the most efficient water and sewerage operators in the UK. Wessex Water is a utility concession in perpetuity. This significant acquisition represents YTL's first major foray into Europe, and marks the beginning of another exciting chapter in the growth and development of the YTL Group.


YTLP investor said...

Stripping out the losses of YTL Com, the remaining assets is priced very cheaply. Given the cashflow generation ability of these assets, I think the market have over reacted to the cut in dividend distribution.

YTLP is reducing dividend payment while keeping cash. For what? I can't tell. But I doubt that losses from Yes will continue for next 3-4 years. The 1Bestarinet win will certainly be a step in the right direction to breaking even.

Disclaimer: I am (painfully) long YTLP for its cash generation ability and growth prospect from discontinuance of losses from Yes.

felicity said...

It should have stayed this way, as by paying higher dividends, the company would be relieved of more opportunities. Seeking opportunities is what YTL is good at. If you look at the balance sheet, the gearing while manageable is not really fantastic. This is probably due to they are moving assets overseas from the massive purchase of Power Seraya. All these assets are capex heavy.

Dividends will come but not now. YTL Comm is probably a bad move though I think.

Thanks for the headsup on the Wessex Water.

YTLP investor said...

Different investor base prefer different thing, previously a large part of YTLP's investor base are income investors.. they abandoned YTLP in drove following the cut in dividend.

I think YTLP has done a fantastic job in the last couple of years in growing its asset base and cashflow generation ability - this has not been reflected in the market's valuation of the counter. YTL's management treatment of YTL Cement's minority shareholder probably didnt gather them many fans among the fund managers as well. Many of the regional fund managers I've spoken to shun YTL Group due to their discomfort with management's treatment of minority shareholder too.

The recent selldown in YTLP has been pretty drastic. The warrant have fallen by more than 40%. Much of this is due to the sell down by YTL and I can't quiet understand why.

I have this theory though - the selldown in YTLP and the concurrent share buy back in YTL could be a prelude to another YTL Cement like privatisation exercise. Your thought on this?

felicity said...

I doubt so as doing that they would need a lot of funds to buy back. The lower dividend I feel is mainly due to the purchase of Seraya Power and market opportunities today. You would notice as I have said, during times like this normally Francis Yeoh would make a killing. E.g. is in 1998 he bought the Bukit Bintang properties at a song. He is an opportunist. You would notice that YTL is now an international company, and with the revenue from power generation in Malaysia reducing by 2015, it would be getting some 90% of income from overseas. The current market conditions in Europe especially and US presents opportunities. To do that, they will need cash though. Currently, YTL is not that cash rich anymore, hence need to build that up.
Fund managers have different objectives and pressure (which is why I have this blog). Their performance bonus are more short term dependent.
If you are long YTL Power, treat this as a long term investment. Unlike some companies which have great dividends, YTL Power is best reinvesting its income.

YTLP investor said...

Yeah, I do agree with the fundamental thesis of the investment thus far.

But the volume of insider (market distorting) trade is hard to ignore. I can't work out why insiders would be dumping their shares at current price (10xPE!). Frustrating to say, insiders usually have better information than the public - they know better.

Francis Yeoh disposed of 21mil unit of YTLP on 28/2 leaving him with 945k unit.

Between 21/3 to 10/5 YTL disposed approximately 111,526k units of its WB.

At the same time, they are buying back substantial amount of YTL shares.

They can complete the privatisation with zero cash, just like what they did with YTL Cement. Pure share swap. There's probably ways to bypass shareholder approval.

This seems to be the only logical explanation. I'll be glad to hold my WB till their expiry in 2018, and may in fact double down if it still trade at this same discount price after their earning announcement.

But corporate malaysia is not always known for a level playing field. If Francis Yeoh and YTL is selling, should we really stay invested in YTLP?

YTLP investor said...

I also don't have a problem with their dividend reduction at all. They have my support to build up their warchest or to pay down their debt..

But the insider sell off in recent months is disturbing..

YTLP investor said...

Food for thoughts:

felicity said...

Seriously, do you believe the insider thing? It could be done to misguide shareholders especially when comes to Malaysian shareholders. The professionalism is in question, when comes to this.

YTLP investor said...

YTLP trading at approx 10xPE compared to its 5 year band of 10-16. Just trying to find the logic behind YTL's WB sell off.
-Pure fund raising? Can be done through placement?
-election kitty fund?
-something more cynical?

I do believe in information asymmetry between insider and outsider. But the rationale for the big sell down by YTL is a mystery to me.

But I suspect the price distorting effect of the trade can be somehow in breach of CMSA without any proper disclosure as to cause. This will be even more so if there's a negative newsflow from upcoming result or attempt to do a shareswap privatisation.

felicity said...

We will never know. This is also why I am careful with stocks that has strong connections to the government.

vincentchang said...

Very unlikely, jordan oil shale project, wimax, one bestari net, prai power plant bidding, indonesia power plant bidding require a lot of funding.