Saturday, January 5, 2013

YTL Power - value share or value trap?

YTL Power's share price has never been so cheap PE wise more recently. It is trading at potentially below 10x both historical and prospective PE based on its earnings potential.

A blogger friend who has been one of the early reader of my blog has written a well researched piece titled YTL Power - value share or value trap? (please read it)

Detailed information have been provided on the company but what many investors could not explain on YTL Power is how is it that the dividend return from the company is on the decline.

I looked back at my one post entitled Is YTL Power running out of ideas? and reconsider back whether the same situation still applies. As in many investors, I am not sure what are the decisions as I can only speculate. However, looking at the situation the company is in, I have mentioned of the challenges YTP Power is facing with the impending renegotiation of the sweet IPP contract (if any) come 2015 and the net cash position of the group. My own prediction is that the group is preserving cash to meet the coming situation in the near future.

At this moment, YTL Power is cheap valuation wise. I do not think it is a value trap but neither is it exciting as there are some uncertainties facing the group with regards to future income stream. Certainly Seraya Power is the main income generator but competition is getting strong as well which is why we are seeing lowering of margin despite the rise in revenue. To me, YTL Power is certainly preparing for the future with some of its future income becoming more uncertain while necessarily hoping to see a turn for its telecommunication business.

However, I certainly am not so sure of its privatisation as in some of the rumours that are circulating - to me the immediate challenge faced by the management is moving the company forward - i.e. to turn it into a growth company again.

19 comments:

Winnfield said...

Not sure if YTL Power could be treated as a value share, YTL Cement was a very attractive and "value" counter before it got privatized at less than book value.

felicity said...

If you look at the cement's business contribution, YTL basically knew that there's good growth. Hence, the privatisation.

Market Watcher said...

Thanks Feli for the recommendation to my post.

I see your point on margin issue at PS, will try to understand that aspect better - but based on my understanding, much of the cost will be due to fuel cost, but given market dynamic of Singapore's power market - there's more variable in play.

I think the IPP is probably going to negatively effect YTLP going forward. But they can simply switch Yes off to negate the effect, hence my belief that the negative news is overcompensated by the decline.

Jordan will possibly offer some excitement - based on news report out there, there's insufficient information to put down a value to the investment. But I guess it will be earning accretive, given the management's track record.

While privatisation is merely a rumour, the grant of discounted warrant and reduction of dividend does have a huge impact on the share price (in my opinion) which will make it a better privatisation candidate. Note YTL has also been doing huge amount of share buyback in the market - thereby propping up their price.

I like the good ole' cashflow generated by the business. Benchmarking it against FD and MGS.

Winn,

Analysing the value of counters in Malaysia, Singapore and US - I find that our exchange have quiet a few "jewel" with strong cashflow generation ability and trading below book value. As an amateur investor, I was frequently excited by the value in the market. However, I find that the market participant disagree with me on the "value" of the company.

It is rather the norm for the share of a counter to rise prior to the good news announcement and drop on the day of announcement. One can only assume that the run up in price was due to insider knowledge of some kind.. but looking at our enforcement history, we can only conclude that insider trading doesn't exist in our country ;).

The "problem" to me is the prevalent of a "speculative culture" within our market. It is often viewed as a casino rather than an avenue for long term investment.

Value is a grey concept - still trying to understand what does graham and dodd is getting at. But I would like to hear from other "investors" out there why they don't see value in counter like YTLP.

felicity said...

Remembering now, there is a very low chance YTL Power is to be privatised. YTL has just given away its YTLPower-warrants to shareholders at 1 existing warrant for every 15 YTL shares owned.
http://www.intellecpoint.com/2012/06/ytl-corp-offering-ytlp-wb-shares-to-its.html

At the same time, before that YTL was disposing off the warrant shares back to the market. Selling and buying back in such a short period is plain stupid - people inside YTL are definitely not stupid.

Also, there has been too much spent on the telecommunication sector for it to stop. The idea is to stop the bleeding not to stop entirely.

Notice EPF is selling hence the rise would only commence once EPF stops selling if the value is there.

Chin Ghee Tan said...

EPF is selling YTLP and picking up YTL, that why the price keep going down, once that stop it will stable. But in longer term, it should recover. WB will be an attractive entry, since the Yeoh's family will own about 412 Million of the WB at 20 cents now. Check on the WB ownership now, there is one investor got cheap warrants prior to the WB sales, they own about 160M of the WB now.

felicity said...

Great stuff Tan, why wouldn't I think of it :)

David said...

@Winnfield
Value should not be mixed up with management intentions/corporate exercises. A great business can be undervalued simply due to divergence between what the company is worth (value) vs what you have you pay for it (share price). There is definitely value in companies like YTLP (look at its cash pile worth RM1.33 per share you're getting the entire business almost for nothing!), and its valuations are definitely cheap at the moment. However, even so one can still lose money buying such a value business due to the management integrity/actions, eg as you aptly pointed out - YTLCMNT being privatized under its BV. In fact, there are more similar examples in BURSA - MMC/AIRB, GOLDIS etc etc the list goes on...

Value Investor said...

@David,

YTLP is not in a net cash position. Based on its 1st Qtr 2013 results, YTLP's total borrowings stands at RM23.2 Billion versus a Cash Balance of RM10.054 Billion which means a net debt position of RM13.1 Billion (Net Gearing ratio of 1.36X based on Shareholders' Funds of RM9.7 Billion).

Its Telecommuncation business lost RM307 million in FYE 2012 and RM60 Million in 1st Qtr 2013. As a latecomer and with the mobile penetration rate of >100%, I can't see how YES is able to compete against the likes of DIGI, MAXIS & CELCOM in mobile and TM (UNIFI) in broadband even after invested a few Billion ringgit.

Although I like its utilities business' strong cash flow generation, I stopped looking at YTLP (for now) when it invested in the cut-throat Telco business. Unless I see a turnaround in its Telco business or when they decided to dispose it off.

Big Sea said...

It looks to me YTL is more and more dependent on its political muscle. A very dangerous approach given the uncertainty over our next election !

David said...

@Value Investor,

Ya, ya you're right. YTLP does have a hefty sum of borrowings under its belt but being in the giant electric generation and other utilities business I guess it's not a big surprise they have such a balance sheet.

My point was on the cash flow statement whereby you will see they have been in positive FCF for the past 3 years (https://dl.dropbox.com/u/72612763/YTLP-CASHFLOW.png). The important thing is they have been stocking up their cash for so long now surely they are up to something big.

Also, I don't think at all that YES can compete with any of the Big 3 telcos in Malaysia. In my own opinion, and I may be wrong here, I would think YES is just an instrument for the YTL group to test the telco market. I think we may see some paradigm shift in the next couple of years if they managed to learn from their past mistakes.

By the way, I am a victim of this so-called "value trap" for I am quite heavily invested in YTLP, a flawed investment decision from a couple years' back. I am trading the WB to offset my paper losses so far so good, and I am waiting to offload all of the mother in my portfolio. I am simply not impressed by the management and how the minority shareholders for YTLCMNT were screwed last time. Very likely history could repeat itself, no?

yhtan said...

@David,

I was trap in this counter earlier last year, and i'm holding because the fundamental still look good despite the lose in YES.

If they propose to privatize with YTL Corp share, that's fine for me. If cash, then i'll say this company really screw minority big time. YTL cement case was a different game, too illiquid and trading under NTA, maybe the Yeoh family trying to unlock it by privatization. Btw did those YTL Cement shareholder lost after privatization? i saw the share price went up after that isn't it?

Market Watcher said...

@ Feli The total EPF disposal between March 2012- Dec 2012 is approx 13.5 M shares. This pale in comparison with YTL+family's transacted volume of 24 M and 233 M shares and warrants respectively.

I would think that the market mover lately would have been YTL rather than EPF.

@ all I think YTL did treat the minority shareholder like sh*t in YTL Cement privatisation exercise. Came across a blog post blasting YTL here:

http://cgmalaysia.blogspot.com/2013/01/ytl-power-why-was-it-listed.html

Basically the author pointed out it is not right for the management to have a goal to transform YTL into a dividend play by "REDUCING CASH OUTFLOW TO MINORITY SHAREHOLDERS AMONG ITS SUBSIDIARIES".

This point was frequently repeated by YTL's management, the desire to stop the leakage of cash to minority in subsidiary - it's pretty disgusting.

But on point of value, I have a contrarian view to many investors on Yes - I see a possibility that the venture will turn to profit. But if I am wrong, I think the downside is factored in.

felicity said...

It is incorrect, YTL Power has cash of RM10b but debt of RM23b. It is a wrong decision if one if to pay high dividends especially with the some parts of the future questionable.

On top of that, the types of acquisition YTL Power embarked on are huge and many a times costing billions.

With recent exercises, like selling the warrants rights, there should not be any privatisation. It sold at RM0.20. How much would it be buying back?

Usually to privatise, it needs to provide premium of say 20% to 30% to current market price. At that price, YTL Power is at above RM2.00, YTL Power-wb at about RM1.00. To just sold at RM0.20 and buyback at RM1.00 is unthinkable.

Chin Ghee Tan said...

@Market Watcher, How did you get the 24M Transaction by Yeoh + Family? I see mainly ESOS or WR distribution from the YTL, can provide details. Mainly one of the Yeoh's spouse is trading the share.

@Feli, previously the WB is owned by YTLCorp, now the WB is own by Yeoh Family directly after paying 20 cents premium. Not making sense for them to take private, unless Yeoh family need quick cash at the expense of YTLCorp. 80 cents premium is a lot for 4XX Millions of warrants. Raise fund for coming GE? Or time to payback for political connection?

Market Watcher said...

@ Chin - I've got a spreadsheet of the shareholding change extracted below, should be accurate.

https://dl.dropbox.com/u/27832175/YTL%20Power.xlsx

Based on shareholding change announcement on YTLP.

@ Feli I agree, it's quiet prudent to conserve cash given uncertainty (given high leverage). They've only got 3 years left in their IPP agreement afterall.

Given YTLC scenario, I think there wasn't a premium paid. It was (based on my recollection) a direct share swap of a relatively undervalued counter with one of relatively fairly valued one.

To add salt, YTL's price was further strengthen by quiet substantial buyback in the period prior to the price fixing date for the swap.

Not very nice to Cement's minority..



Chin Ghee Tan said...

@Market Watcher
Many thanks!

felicity said...

Amazing

ahyu02 said...
This comment has been removed by the author.
ahyu02 said...

Hi Felicity, YTLP-WB is a company warrant, right?

Is there a way for me to check the warrant information (for example: exercise price, expiry date and etc)? Can I get the information from bursa website?

Thank in advance :)