'Hold' on YTL Power and Sarawak Cable, 'market perform' on MMC


  • Business
  • Tuesday, 16 Sep 2014

YTL POWER INTERNATIONAL BHD

By AmResearch

Hold (maintained)

Fair value RM1.56

THE Economic Times reported that YTL Power was in the advances stages of negotiations with India-based NSL Group to acquire up to 49% stake in NSL Orissa Power and Infratech. NSL Orissa Power is setting up a 1,320MW coal-fired power project in Angul, district of Orissa with an investment of 8,000 crore rupees (US$6.8mil), which is being funded through debt to equity of 70:30.

NSL Infratech is involved in operations and maintenance services for the power plant as well as real estate and infrastructure. The company has acquired land for the thermal power project, obtained approvals from the authorities, and awarded the engineering, procurement and construction contract to Tata Projects.

AmResearch said the full capital expenditure of a 1,320MW coal plant could easily reach US$2.3bil, based on Tenaga Nasional Bhd (TNB) Project 3A’s US$1.7mil per MW.

Based on a 30:70 equity to debt ratio, AmResearch said it expected the 49% equity stake in the plant to cost RM1.1bil, which is well within YTL Power’s funding capability.

AmResearch said it was cautious on this investment given India’s regulatory uncertainties over coal and electricity supply to off-takers.

For example, it said TNB’s combined cycle Liberty Power gas plant in neighbouring Pakistan had encountered fuel supply issues in the past which required significant impairments for its investment.

The research house said there was a strong likelihood that the power purchase agreement for the Paka and Pasir Gudang plants may be extended by a few years, given that Peninsular Malaysia’s power reserve margin may drop below 30% by 2016 if the first generation plants were taken offline.

Nevertheless, AmResearch remained cautious on Yes’ losses given the group’s commitment to expand its services to 10,000 schools in Malaysia under the 1BestariNet project.

It said there was a likelihood that the breakeven level may not be achievable after Yes achieved its targeted subscriber base of one million.

It said the stock currently traded at a fair FY15 forecast PE of 12 times, at the high region of its three-year PE range of 10 times-12 times, with an absence of dividend visibility.

MMC Corp Bhd

By Kenanga Research

Market perform (maintained)

Target price: RM2.81

KENANGA Research said it noticed that MMC was gaining interest recently due to the group’s second-quarter 2014 earnings recovery driven by Malakoff’s Tanjung Bin power plant recovery and Klang Valley Mass Rapid Transit (KVMRT)’s construction progress.

The research house said it believed the probability of its listing of Malakoff had increased with the recovery in the latter’s earnings.

Kenanga Research reckoned the bigger push factor was due to the junior sukuk of RM1.8bil which is due in Sept 2015 (6.3% interest rate).

“If Malakoff does not redeem the Sskuk, it has to pay higher interests to the bondholders.

On that basis, the listing should ideally take place before Sept 2015. If this is really the case, it will be a major re-rating for the stock,” it added.

Kenanga Research said it had also seen MMC’s other key divisions (construction and ports) gaining momentum, thanks to the KVMRT1’s progress and growing activities at the Port of Tanjung Pelepas.

However, Kenanga Research said it decided to maintain its market perform call on MMC with a revised target price of RM2.81 (from RM2.77 previously).

The research house said it was cautious over the potential delay in the 1000 MW Tg Bin extension which may affect the stock’s sentiment in the near term.

Even though it might not impact too much on Malakoff’s discounted cashflow valuation (-5 sen reduced to our sum-of-parts if delay by six-12 months), Kenanga Research said it preferred to remain conservative here as it would prefer that there is more clarity on the issue to avoid impact on investors sentiment.

It said while it liked MMC due to the potential listing of Malakoff in the second quarter of 2015 which would clean up the group’s balance sheet, growing earnings in its ports and construction divisions, and recovery of core earnings in Malakoff, Kenanga preferred to get some clarity regarding the issue of Tanjung Bin’s extension delays.

Sarawak Cable Bhd

By AmResearch

Hold (maintained)

Fair value: RM1.60

SARAWAK Cable announced last Friday that it had accepted the conditional offer made by HNG Capital Sdn Bhd for the proposed acquisition of the latter’s 100% stakes in Universal Cable (M) Bhd (UCMB) and Leader Cable Industry Bhd for RM210mil.

Following the acceptance, Sarawak Cable paid RM2.1mil in earnest deposit to HNG Capital. The parties have until Oct 13 to finalise the terms and conditions and to enter into a conditional shares sale agreement.

AmResearch said while details of the deal have yet to be firmed up, a business weekly reported earlier that Sarawak Cable may issue up to 10% of new shares to fund the acquisitions and that it may also borrow RM110mil with the remaining RM60mil to be offset by debts owed by HNG to the two companies.

It added that the acquisitions would make Sarawak Cable the leading cable player in Malaysia, adding that Sarawak Cable would also be the only producer of 275kV underground cables in Asean.

The research house noted that HNG Capital would guarantee a total pre-tax profit of RM21mil for the two companies for financial year ending Dec 31 and that any shortfall would be paid by HNG.

AmResearch said it understood that margins for the two companies could be lower than Sarawak Cable’s current cable business but added there were plans to improve it post-acquisitions.

UCMB has three factories in Nilai and one in Johor, while Leader Cable has one in Kedah.

The research house expected Sarawak Cable’s market share in Malaysia to grow to 50% with the acquisitions.

As details are yet to be firmed up, AmResearch said it had not factored in the proposed acquisitions into its model, maintaining a “hold” on Sarawak Cable.

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