PETALING JAYA: Analysts are mostly positive on YTL Power International Bhd
’s latest proposal for a bonus issue of warrants, of which the proceeds will be used to fund the group’s key projects.
The bonus issue of one warrant for every five existing YTL Power shares is for a total issuance of 1.67 billion warrants.
Each warrant will be convertible into one YTL Power share, which upon full conversion represents about 20% of the existing share base. The warrants will have a three-year tenure with the exercise price set at RM2.45.
CIMB Securities Research in a report said “in our view, given the low exercise price of a 40% discount to YTL Power’s current share price, shareholders are likely to convert the warrants.
“Thus, this is essentially a rights issue with flexibility given to shareholders in terms of the timing of their participation,” it noted.
If all warrants are converted, the brokerage firm said YTL Power will raise RM4.1bil in cash, of which RM3.7bil will be used to fund future investments, mainly for data centres and potential capital requirements from Ranhill Bhd, with the balance earmarked for working capital.
“Beyond this exercise, YTL Power does not see a need to further raise equity funding over the next three years,” said CIMB Research.
Simplistically, if the proceeds are used to repay debt, YTL Power’s net debt/earnings before income tax, depreciation and amortisation (Ebitda) at end-financial year 2025 (FY25) would ease to 3.9 times from 4.6 times, added the brokerage firm.
Furthermore, considering the interest cost savings and an enlarged share base, CIMB Research said it estimates a 4% higher cumulative FY26 forecast earnings per share (EPS), as a shareholder that has five shares pre-exercise will have six shares post-exercise.
All else being equal, a rights issue is neutral on shareholders’ wealth, CIMB Research said, adding that “however, it could potentially be positive if proceeds are used to fund new projects with attractive returns or to increase equity stakes in existing value-accretive projects, and vice-versa”.
While rights issues can sometimes trigger negative near-term share price corrections, the brokerage firm does not expect the reaction to be as bad, as investors do not need to immediately fork out cash.
Hence, CIMB Research has maintained a “buy” call on the stock with an unchanged target price (TP) of RM5.20.
Meanwhile, Kenanga Research in a note to clients said the substantial 44% discounted exercise price presents an attractive reward for the group’s shareholders and this will attract buying interest.
“However, this exercise does not guarantee long-term shareholder retention, as they can exercise the warrants at any time, especially since the exercise price is set at a discount to the market price.”
In addition, the warrants being unlisted is uncommon and thus warrant holders can only monetise through conversion to shares.
“To this end, we believe YTL Power’s shareholders are most likely induced into doing so early as well to mitigate pressure of EPS dilution,” it added.
On a fully-diluted basis, Kenanga Research said the stock’s TP will be adjusted to RM4.49 from RM5, with a blue-sky scenario of RM5.74 from RM6.53.
The research house has maintained its forecasts on the group, given that the proposal still has to be approved in an EGM.
