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How to Value Company - YTL Power says its shares are undervalued

“People are valuing our company in terms of dividends but our company holds a fair share of regulated assets. “There is a lack of understanding on how these assets should be valued,” group managing director Datuk Yeoh Seok Hong tells StarBizWeek.

WITH its plans to move into higher growth areas, YTL Power International Bhd believes its shares are undervalued at current levels. “People are valuing our company in terms of dividends but our company holds a fair share of regulated assets.

“There is a lack of understanding on how these assets should be valued,” group managing director Datuk Yeoh Seok Hong tells StarBizWeek.

Listed on Bursa Malaysia’s main market, the group has a market capitalisation of RM4.8bil. “In YTL Power’s portfolio, we have assets with a power purchase agreement (PPA) and other regulated assets.

“PPA assets have a concession over a period of time. As time goes by, the valuation of the PPA drops as the years left in the concession decrease,” Yeoh says. He explains that the regulated assets, on the other hand, are different as their value goes up as time goes by.

“Every five years, we have a programme with the government to invest. Then the asset values will go up and after deducting depreciation, we will get the new asset value calculated,” Yeoh says. He cites Wessex Water in the United Kingdom, which is wholly owned by YTL Power, as a regulated asset.

He adds that regulated assets are also “inflation protected”. “If inflation goes up by 5% every year, the regulatory capital value will likewise go up by 5%. The asset value will never be depreciated as it will always go up with inflation,” he says.

The group’s recent sale of its 33.5% equity stake in Australian-based ElectraNet Pty Ltd, also deemed a regulated asset by Yeoh, netted it a gain on disposal of RM2.21bil. YTL Power sold its stake in ElectraNet early last month for AU$1.026bil (RM3.15bil). The sale represents a 1.6 times its regulated and contracted asset base (RCAB) and 1.9 times the regulated asset base (RAB) valuation, YTL Power says.

“I did speak with several analysts earlier and I asked them how much did they value the ElectraNet asset. They told me they did not ascribe a high value to the asset. “But now after we sell it, people begin to understand what’s the actual value. Buyers are willing to pay 1.6 times the RCAB for ElectraNet,” Yeoh says.

CGS-CIMB in its report dated end-February had forecast an enterprise value-to-earnings before interest, taxes, depreciation, and amortisation valuation of 10.12 times for YTL Power in the financial year ending June 30, 2022 (FY22).

It has also forecast a dividend yield of 5.6% and net gearing of 172% for the group. CGS-CIMB’s forecasts also show that YTL Power is at a 0.38 times price-to-book value level. For its Wessex Water unit, Yeoh says that its RAB has more than tripled in ringgit value since its acquisition back in 2002 to £3.5bil (RM19.29bil) today.

“This is if you take the same 1.6 times regulatory capital value multiple paid to us recently from our ElectraNet and apply it to the Wessex Water asset,” he explains. The Wessex Water currently has an enterprise value of £5.52bil (RM30.43bil) and a net debt value of £2.35bil (RM12.95bil).

Yeoh notes that he considers this as a growth asset, which not only provides dividends but also an increase in RAB value through new investments. The group highlights in its presentation fact sheet that it would effectively be in a net cash position following the disposal of ElectraNet. This assumption excludes the ring-fenced subsidiary or associate assets which are mainly in net-debt since a majority of its consolidated debt is ring-fenced within the asset level and not at the group level. “They (the subsidiaries) have no recourse against YTL Power,” it says. Yeoh says he prefers for the group’s strengthened cash position to be deployed to its current and new planned upcoming investments than a share buyback programme. “As for dividends, there will be no windfall. The extra cash from the recent sale will be reinvested into the business,” he says.

YTL Power in its annual report says it remains on the lookout for viable new growth opportunities, particularly in its core competency of regulated businesses which operate under long-term concessions.

Meanwhile, Yeoh says the group sees new growth opportunities in the telecommunication space, which it is exposed to through its 60%-owned YTL Communications Sdn Bhd. “If the government proceeds with the single wholesale 5G services network (through Digital Nasional Bhd), then it is good for us because we don’t have to invest any more capital for spectrum or to build infrastructure. So it will be a competition on finding solutions and innovations,” he says.

“Previously, it was more of competing based on infrastructure – so if a network operator invested more than they would have better infrastructure and speeds. This would also mean that YTL Communications would not have as much cash burn as before, which would translate to better cashflows for the group,” Yeoh adds.

He also notes that the group’s Brabazon masterplan property development in the city of Bristol, UK, have had an increase in density levels approved, which would increase the gross development value to £3.2bil from £2.5bil previously. “This project will be a significant contributor to the group in about one to two years from now,” Yeoh says.

YTL Power’s other recent ventures also include the development of green data centres that will be powered by solar and this will be another growth area for it. These green data centres – some are completed and some being developed – are located in Johor Baru and Sentul, Kuala Lumpur.

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