Wednesday, July 31, 2013

This is not a small blip

When Fitch comes out and downgrade our sovereign rating from stable to negative, this should be looked at it entirely and is serious. Few times, I have highlighted the danger of over lending by the banks, but little did I mention about the government's debt.

With that downgrade in rating, it seems that we have a dual problem, i.e. not just on the overly high consumption debt among the people, but it includes national debt which if not kept in check may turn out into a problem to the country. With the negative outlook, our borrowings cost may just go up. If you have noticed, we have gone more overseas to get our funding although a large portion of our national borrowings still come from within i.e. from EPF, KWAP etc.

Besides the published national debt, another cause of concern is the off balance sheet debt where it seems that many people do not even know the extent of the off balance sheet debt. Frankly, if the off balance sheet debt is not kept in check, the government itself may not even know the quantum of the guarantees and other contingent liabilities that may have already been in place.

I think with the extent of the downgrade, it would be good for any investors to reposition their investment portfolio to assets which are not too overexposed to the consumption, government awarded projects or rather who are dependent on those projects. In fact, concentration should be focused on companies which are export led and companies where the assets are located overseas rather than those which are fully dependent on local consumption.

24 comments:

hng said...

Hi Felicity

I simply don't understand, why Maybank failed to highlight recent contract award to YTL Power to supply chromebook and Mobile lab to over 2000 secondary school !?

Mobile lab cost RM 86,000 each: 2,839 unit x RM 86,000 = RM 244m
Chromebooks cost RM 1,255 each: 116,399 units x RM 1,255 = RM 146m

News:
YTLC equipped for 1BestariNet project
Kamalanathan: YTLC equipped for 1BestariNet project
Business & Markets 2013
Written by Fatin Rasyiqah Mustaza of theedgemalaysia.com
Wednesday, 24 July 2013 09:51

KUALA LUMPUR: YTL Communications Sdn Bhd (YTLC), a unit of YTL POWER INTERNATIONAL BHD [ ], is well equipped to undertake the 1BestariNet and Chromebook (laptop) supply projects, said Second Deputy Education Minister, P Kamalanathan.

“They have the ability to do the job. We have seen some of the work they have done and we are very impressed with it,” he told The Edge Financial Daily in an interview.


He said the bidding process for both projects was evaluated and monitored by the Performance Management and Delivery Unit (Pemandu), the Malaysian Administrative Modernisation and Management Planning Unit (Mampu) as well as the Securities Commission.

Kamalanathan said YTLC would not only provide its 4G Yes Internet service and virtual learning environment (VLE) and the Chromebooks, it will also erect its own transmission towers and build mobile labs as part of the contract.

He said that with a long-term project such as this, YTLC has more cost advantage and offers “a lot of value-add” for both projects as the company is able to provide various services in one bundle.

“Why would we ask two or three people to do the job when we can have only one person to do it?” he asked. Kamalanthan revealed that 19 companies had put in bids for the 1BestariNet project and only six were shortlisted. The companies shortlisted were Celcom Axiata Bhd, Maxis Bhd, Multimedia Synergy Corp Bhd, TELEKOM MALAYSIA BHD [ ] and TIME DOTCOM BHD [ ] as well as YTLC.

As for the supply of Chromebooks, Matrix One Solution Sdn Bhd, Mutiara Smart Computing Sdn Bhd, Trustwell Sdn Bhd, Bitara Induk Sdn Bhd and YTLC were the companies shortlisted for the job.

“The company chosen for the job was evaluated through its competency and capabilities in implementing the project at a very affordable rate,” said Kamalanathan.

The 1BestariNet contract, which was authorised by the Finance Ministry, is valued at RM663 million for a tenure of 2½ years. The project was implemented in January 2012. According to Kamalanathan, RM463 million has already been paid to YTLC.

As at May 31, 2013, the company had completed 1,503 transmission towers or customer premises equipment (CPE).

As for the supply of Chromebooks, each unit is priced at RM1,255 and comes with a three-year guarantee.

The project took off last month and will be implemented in phases. YTLC will be providing 116,399 units for 2,839 “mobile labs”.

These mobile labs, which are portable storage and charging trolleys equipped with WiFi, enable teachers to utilise the Chromebooks in their classrooms. Each mobile lab, costing about RM86,000, can hold 41 Chromebooks.

The Education Ministry is currently targeting 2,002 schools, mainly secondary schools, for the Chromebook project.

The 1BestariNet and Chromebook supply projects have of late come under heavy criticism from the opposition coalition.

The DAP MP for Bukit Bendera Zairil Khir Johari had, among other things, questioned the rationale for awarding “several projects worth RM9 billion” to YTLC.

Kamalanathan, however, refuted the figure, saying “I want to know where he [Zairil] got the RM9 billion figure. He did not calculate it the right way”.

hng said...

Based on 3Q result: PBT for Power generation (151m: profit margin 18%); Utilities/Power Seraya (507m: profit margin 5.8%); water and sewerage (506m: profit margin 27%); Brondband/1besterinet (loss RM 193m).

The loss in broadband attributed to 17% of the total earning. According to YTL Power management, YTL broadband division is expect to breakeven by end of 2013. If materialize, YTLP without take into account potential future earning contribution from broadband, just alone breakeven already is earning enhancer by as much as 17% in EPS already.

In addition, YTL Power majority of earning contribute by oversea concession, currency appreciation UK pound and Sing dollar against ringgit, will add more earning to YTL P bottom line.

felicity said...

Without details I am not able to provide the analysis. However, as YTL has embarked on having its own tower as well as WIMAX equipment as compared to say UMobile which rides on other telco's line, this coverage of school (and being paid for it) is a 2 prong strategy i.e. getting the contract and using the same infra to cover for the public.

This strategy would reduce the costs of YTL in rolling out infrastructure for its telco business. The problem for YTL in the long run however is can it even compete despite the lowered infra costs as I am already experiencing speed that is faster than Unifi 5MB through my phone's LTE in areas which are covered by Maxis and Celcom. Over time, the so-called advantage that YTL may have (as they claim) will be blurred not only by TM's unifi but also LTE.

Of course, on the school project, one will want to ask were there any tender for this or they were on direct nego.

Fung C.F. said...

As always (for value investors), a panic like this is a good news.

Cronies and government-linked business models should be avoided altogether.

Nonetheless, everyone should now require for higher Margin of Safety, given the "negative" outlook. Say high to single-digit PE!

Fung C.F. said...

I mean "Say Hi..." XD

DayTrader said...

Its indeed a worrying trend and can't say that we didn't see it coming. Petronas' long term debt rating was also downgraded to negative and that will have an effect on its borrowing cost and ability to carry out more mega projects. A definite warning to the market but we are still far from a euro style meltdown unless oil price takes a big hit which is unlikely in the short term.

Fingers crossed but I hope it serves as a wake-up call to the government to mend its ways. Sadly these things have a strange way of being swept under the carpet these days.

We will probably see GST being implemented after the UMNO elections and petrol subsidies further reduced to help reduce the deficit. Strangely there's also been a severe shortage of diesel which is a heavily subsidized commodity, citing smuggling activities. So many dots to connect.

felicity said...

Ya I think GST is a given

hng said...

Hi Felicity

YTL Power also has awarded 4G LTE by MCMC last Dec 2012. However, YTLP has yet to roll out its 4G LTE but instead is focusing now to complete 1bestarinet to reap recurring income, its power by 4GWimax to wired up 10,040 (7711 primary school + 2329 secondary school) nationwide by end of these year.

So far, YTLP has complete all installation in all school base in peninsular (total: 5365 primary school and 1921 secondary school) and in the midst to install in East Msia now.

hng said...

This article first appeared in The Edge Financial Daily, on 13 May, 2013.

Highlight: YTL’s 4G push

KUALA LUMPUR: Nearly six months after the Malaysian Communications and Multimedia Commission (MCMC) awarded the highly sought-after 4G-LTE (long-term evolution) spectrum to eight local telco players, only two providers have rolled out services and two have expressed plans to do so in the near future.

The others have kept mum on their plans, particularly Tan Sri Syed Mokhtar Al-Bukhary’s Puncak Semangat Sdn Bhd, which had received 40MHz of the 2.6GHz spectrum.

Although some question the delay in the deployment of 4G-LTE services to the masses, there has been no announcement even by the MCMC on a deadline for the telcos to roll out the network.

For YTL Communications Sdn Bhd CEO Wing K Lee, the decision for YES 4G to delay the rollout of 4G-LTE network is a calculated and carefully weighed one.

“In my opinion, 4G-LTE is a 2014 story. If MCMC tells us that we must deploy soon, we are ready to do so on our WiMAX network. It’s just that we need the technology to be more mature,” he said in an exclusive interview with The Edge Financial Daily.

“We will launch LTE when the time is right but that day is not today,” he added.

The 2.6GHz frequency on which the spectrum runs is not the industry standard across the world.

In fact, countries such as the US, Australia, and Thailand use the 1.8GHz band to deploy 4G-LTE, while others use either a combination of frequencies or the 2.6GHz.

This poses a rather interesting challenge not only for telco providers but also for device manufacturers which supply smartphones and tablets to consumers.

“Devices are simply not ready yet. In fact, there is no such thing as 4G-LTE roaming. No manufacturer can make a device which can accommodate all of these frequency bands. If they do, it will be the size of a radio.

“So naturally manufacturers will build according to the most popular band as in the case of Apple’s iPhone which is built to accommodate the 1.8GHz band,” Lee said.

For more devices to be made on the 2.6GHz frequency, manufacturers would have to see a compelling enough demand from the market, which is sorely lacking.

China and India have said that they will run LTE services on the 2.6GHz band, but this remains to be seen as China has yet to set a date to auction or award the spectrum. India’s target to roll out services this year could be subject to delays.

“Until China and India hit critical mass and have solid plans to roll out LTE in their countries, there will be a gap in devices specifically those that cater to Malaysia’s specifications,” Lee said.

Although some may grumble the allocation of spectrum was unfair as unknown entrant Puncak Semangat had received the lion’s share, Lee is happy with the allocation given to YTL Communications. “We think it’s good enough and also we have the 2.3GHz to run on. So Puncak Semangat gets 40MHz, it’s starting from scratch after all,” he said.

Lee was reported to have said that a key challenge for telco operators moving forward is the “all-you-can-eat data pricing”, which he said is not sustainable”.

Recent Reuters reports noted that consumers in the US were not taking up 4G-LTE plans as much as operators would like them to. South Korean operators cautioned telcos in other countries that the average revenue per user was insufficient to recover the cost of investment involved in setting up the network.

“The business model and cost structure are largely based on a telco’s voice network with data as an add-on, but the reality is that it is now the other way round.

“Companies must embrace a data network and voice should be provided as an add-on,” Lee said.

According to a report by RHB Research Institute, YTL Communications is likely to focus on implementing its RM4 billion 1Bestarinet project awarded by the government in 2011 to provide WiMAX services to 10,000 schools in Malaysia.

felicity said...

Hi Hng

Wimax was sort of a bit of advantage in terms of speed to the players such as YTL, Green Packet, Redtone etc. However, once the LTE is out and proven to be fast enough to entice people that WIMAX is not needed, the advantage that so-called YTL supposed to have is gone.
In any case, even with WIMAX, it was a tough one for YTL as very few devices support WIMAX. This is not true for LTE as devices today are already supporting LTE with its chipsets.

For that matter, I presume YTL has to quickly move to LTE rather than WIMAX as the latter is going to be a tough bet for YTL as it is going alone as compared to MAxis, Celcom, Digi etc whom are moving towards the LTE initiative.

hng said...

Hi Felicity

I do agreed, YTLPower is very conservative, it opt to develop Wimax which is more mature technology rather than venture into more advance but still developing technology LTE like Maxis, DIGI and Celcom. These telco is pioneer now just like last few day back venture into 3G, which at that time, only Maxis and Celcom aggressively launched 3G, while DIGI awaiting

However, these Wimax already satisfy MOE and award 1bestarinet project to YTLP. Furthermore, YTLP already equip itself with license develop LTE and all its current developing tower are LTE ready. I think once, the technology is proven and market demand build up, YTLP can turn fast by changing Wimax to LTE

hoseadavids said...

YTL is another crony company that can't stand on its own feet.

It is laden with huge debt.

Wimax is a dinosaur technology when compared with LTE.

Nobody is talking about wimax anymore. Technology company has to changed fast else it will lose market share very fast.

Unfortunately YTL Power started off on the wrong foot and is still stuck with it.

hoseadavids said...

The latest financial report for YTL Power:


Long term Loan: 20.9 BILLION
Short term Loan: 2.5 BILLION

Cash: 10.8 BILLION

The debt is very scary indeed.

hoseadavids said...

YTL Power Dividend has been shrinking and there has been NO dividend given in the last two quarters.

hoseadavids said...

YTL Power dividend history:

2009: 13.88
2010: 13.13
2011: 9.38
2012: 4.69
2013 as of today: 0.94

As you can see, dividend is shrinking.

I would avoid this stock.

hng said...

hoseadavids

YTLP rising debt is due to capex incur to develop Yes Wimax and 1besterinet, so far it has invest RM 2b already. YTLP opt to not payout dividend is to conserve its cash, as show it cash also has raising from last 2 year RM 7.7b to current RM 10.8b. I believe this is short term solution to scarify dividend income for shareholder which i think will be rewarded later, otherwise its WB also is an alternative choice for cheaper exposure.

As state earlier, YTLP already equip itself with LTE and is ready to launched if those pioneer like Maxis, Celcom and DIGI is success. Changing from Wimax to LTE is relatively faster for YTLP as all its Wimax tower are LTE ready.

There is no doubt that YTLP is perceived as UMMO or Matahair corny, which lead it secure lucrative contract like 1 generation power plant and 1 bestarinet. But we cannot deny YTLP capability as it also successful secure major concessionaire oversea, Power Seraya in Singapore; Water Wessex in UK; PT Power in Indonesia and recent shale oil in Johan and in fact more than 80% of YTLP current earning is derived from these oversea concessionaire.

hc said...

Hng,

In that case, why rush buying YTLP share now where they still havent prove their self yet?

hng said...

hc

I'm not here promoting to buy YTLP here, i'm just wanna to share here that YTLP is about to turnaround and its future prospect and potential.

hc said...

Hng,

Dont get me wrong, never thought u r trying to promote YTLP. I follow u from Horse blog n have lots of respect for u. Only this time puzzle me ur decision on YTLP. Cheers!

hng said...

hc

The main purpose having forum or blog is to exchange each one idea, information and investment thought.

I believe through various input, together we can minimize risk and improve our stock picking skill.

Fung C.F. said...

Since YTLP is discussed here, I would like to share my 2 cents.

I was crunching the numbers of YTLP before GE13 to find whether the stock is undervalued, I gave up due to the technicalities and the business is very hard to understand.

The soon-to-be-expired IPP is an open secret to everyone, renewal is uncertain but I believe the power plants are still worth for billions Ringgit if they have to sell.

Nevertheless, Power Seraya is still the main contributor of cash flows. It is however different to the IPP model, and it sells electricity in a much more competitive environment. Cash flow is steady but profit margin is a notable risk.

The substantial long-term debt was acquired along with Wessex (if I'm not mistaken) from the fallen-Enron. Wessex supplies water to millions people in UK so the debt coverage power is quite ascertained.

However, I saw the discussion here mostly surrounded on the broadband business, which is yet to contribute any cash flow (it is in fact burning cash). Any forecast on future performance is very much about speculation, in which the possibility of error is 50-50. Therefore, I think the interested-investors should apply the most conservative assumption on the broadband business (i.e. fail).

I couldn't derive the intrinsic value of YTLP after my analysis on it, so I gave up and move on. There are many more opportunities in the market that can be understood easier.

felicity said...

Hi Fung

I don't think there is a need to crunch any numbers and like you have said, it can be complicated. I on the other side do not think it is that complicated, but due to the fact that the contractual term for the current IPP contract with TNB is to end soon and the new one is yet to be revealed, that itself is a risk.

Another factor is that with the 1MDB buying IPP assets from the rest except for YTL and Malakoff, that is another area which is uncertain for YTL.

Like what can be read from the comments here, the main income for YTL Power is Power Seraya and Wessex Water. They do bring decent cashflow despite the business environment being fought in a more open competition manner.

Over the last few years, despite the very good marketing made by the main man in YTL, there have not been much progress with the company and another factor which is of course prevalent although not worrying is the high debt. This shows that YTL Power will not be able to grow as it wish as it is more of a company which buys assets to the tune of billions of dollars to make any progress significant and it has to make its move carefully.

The telco business is a blip and I am not betting any money on it. ANything positive from the telco is an extra by the way.

And guys thanks for being courteous despite the conflicting opinion on YTL Power.

hng said...

Lets compared current and 3 year ago YTL balance sheet to reexamine its financial strength after it start venture into Wimax.

2010 (2013)

Non current assets: 23,407 (25,606)
Current asset: 9,473 (13,769)
Cash: 6,638 (10,925)
Total asset : 32,880 (39,375)
Total equity: 6,956 (10,184)

Non current liab: 21,181 (23,940)
Current liab: 4,742 (5,249
LT Borrowing+ bond: 18,233 (20,908)
Current borrowing: 2,32 (2,56)
Total Liab: 25,923 (29,190)

Net Asset per share: 1.00 (1.36)

Financial ratio:

1. Net Gearing : 2.95 (2.30)
2. Current ratio: 1.998 (2.62)
3. Cash ratio: 1.40 (2.08)
4. Debt ratio: 0.788 (0.741)
5. Debt/equity ratio: 3.726 (2.866)

Valuation

1. Share price/book: 2.27 (1.205)
2. PE: 12.1x (10.9x)
3. DY: 13.13sen (nil)
4. Yield : 5.8% (nil)

(Remark: YTLP share price on 2 Aug 2010 was RM 2.27; annualized EPS 18.66sen vs. current share price RM 1.64; annualized EPS=15sen)

Fung C.F. said...

Felicity, thanks for your comment. I was on the verge of clicking buy on YTLP 2 months back after seeing the tremendous shares buy back, but I pulled the handbrake after a friend reminded me not to buy stock that I couldn't understand. I asked myself - is YTLP worth RM10b in cap? I simply couldn't answer it even after crunching the numbers (can't figure out the normalized earnings/cashflow/dividend), that is why I gave up. I have no regret even the share price skyrocketed now because I've found other equally profitable investment.

However, I'm a big fan of YTL's acquisition strategy and I loved watching them buying good companies at cheap valuation. I think that is why they are quiet recently as cheap deals are not easy to find. With RM10b cash in hand (although net debt overall), I guess they will pluck out around RM3b to buy good asset(s). Francis Yeoh is one badass when comes to acquisition. XD