YTL Power -Losing Power?

Shares in YTL Power have eroded more than 2 per cent during the past week.Why? Neddling worries that the cash-rich company could be using their money to fund the YTL Group's RM2.5 billion (S$1.02 billion) investment in its wireless telecommunications business in Malaysia could be one.

YTL Power, a 51 per cent subsidiary of YTL Corporation, is an institutional favourite among portfolio investors because of its high dividend payout - 6 per cent annual yield - and steady, recurring earnings from power generation and water and waste management services in Malaysia and elsewhere.

In June, the firm made what one analyst described as an 'inconspicuous' announcement to the stock exchange — that it was buying 60 per cent of private firm YTL Communications from a related YTL unit for RM300,000.

Given YTL Power's generally heroic standards, the scale of the purchase was laughably dismissive, but YTL Communications is one of three firms awarded Wimax (Worldwide Interoperability for Microwave Access) licences by the Malaysian government two years ago.

It is a known fact that the government is putting pressure on these firms awarded Wimax to start up quickly or earn its displeasure one of which is to revoke their licences if they do not increase broadband coverage quickly enough.

The sell-down of YTL Power's shares reflects the concerns of investors who worry that a perfectly sound company could dent its earnings by venturing into a risky and intensely competitive business that has never really taken off worldwide.

Even YTL's technology partner, US-based Clearwire Wireless, is currently loss-making. Meanwhile, Green Packet, another Malaysian firm that's been Wimax-licensed and has already rolled out a portion of its network, made a first-half 2009 loss of RM50 million. Analysts have also noted that the YTL Group's capital expenditure plans are 2.5 times those announced by Green Packet.

YTL Power has always grown through acquisitions, using the cash flows from its power generation businesses in Malaysia to buy steadily profitable utility assets in mature markets — power assets in Singapore and Australia and water plants in England, for example. In that context, its potential entry into a risky business in Malaysia runs counter to its proven business model.

Still, that is not to say the Wimax business, however risky, could profoundly damage the company. It is controlled and run by tycoon Francis Yeoh , who has turned the eponymously-named YTL — after his father Yeoh Tiong Lay's initials — from a RM200 million firm into a multi-billion dollar business. Yeoh is generally rated by analysts as a prudent manager.

Nor is the firm financially shaky. It made a net profit of over RM625 million on sales of RM6 billion in 2009. It has annual free cash flow of RM2 billion and a cash hoard of RM1.5 billion.

In downgrading YTL Power to a 'sell', however, Arab-Malaysian Bank's research unit said the group's potential entry into telecommunications is a 'negative development as it will be extending its business — which provides stable, incurring income streams — to the uncertain revenue of a technology that has yet to fully kick off even in developed countries.'

The bank estimated that with this potential development, the firm's fair value is RM2.05 — versus RM2.12 currently.

Meanwhile, Bloomberg reported that Calyon and Natixis are among seven banks that agreed to lend $1 billion to YTL Power International Bhd for its acquisition of PowerSeraya Ltd in Singapore.

Maybank Investment Bank, Oversea-Chinese Banking Corp, Bank of Tokyo-Mitsubishi UFJ, National Australia Bank and Sumitomo Mitsui Banking also contributed to the three- year loan, which was arranged by DBS Group.

DBS agreed to provide YTL with a $2.25 billion credit line in December after the Malaysian utility bought Singapore power generator PowerSeraya from Temasek Holdings for about $3.8 billion.

Looks like while one is calling it poison, the other is calling it manna, aren't they, Francis?