PETALING JAYA: Last week's sudden buying interest in YTL Power International Bhd was driven not by power but water - literally.
Investors were attracted to the counter mainly because of a revaluation of YTL Power’s 100%-owned Wessex Water Ltd by overseas analysts rather than its power business in Malaysia and regionally, an analyst with a local brokerage said.
The stock, which had been picking up due to buying pressure, largely from foreign funds, closed unchanged yesterday at RM2.12 on volume of 1.44 million shares. The counter had gained 8.7% from its closing price of RM1.95 last Monday.
In a report yesterday, OSK Research said current merger and acquisition activities in the water industry in Britain had generated a great deal of euphoria that boosted the valuations of water utilities.
“It makes sense to benchmark Wessex Water with the valuations of its peers in Britain that have gone up,” an analyst at a local bank-backed research house said, adding however that there was no indication that Wessex Water itself would be participating in a merger or acquisition.
“Although the power-generation division offers steady and predictable cash flow, its contribution as a percentage to turnover and EBIT (earnings before interest and tax) is relatively lower compared with Wessex Water,” said OSK Research.
The power-generation division contributed 32.2% and 32.4% to YTL Power’s turnover and EBIT respectively in the financial year ended June 30.
On concern that earnings would decline should capacity payment be cut, OSK Research said it would only be temporary since it would give a neutral effect on cash flow.
“Although the Government has targeted to complete new power purchase agreements (PPAs) by the end of this year, we believe implementation would not yet take place in the next 12 months.
“Any changes in the PPAs are likely to have a neutral impact on YTL Power’s cash flow since the cut in capacity payment would be compensated by a longer concession period,” OSK Research said, adding however that there was a risk it could limit future dividend payment streams.
OSK Research said it continued to like YTL Power for its steady cash flow and attractive dividend yield of 4.7% while the continued share-buyback exercise would limit any downside to the share price.