YTL Power Warrants-Is there still worth?

Possible Sell-out to 1MDB

I am looking from the perspective of a YTL Corp shareholder who will soon be offered a 1 unit of YTL Power Warrants  for every 15  shares of YTL Corp held before its share-split  for the subscription price of RM0.20 sen.

Looking at today's price of  YTL Power Warrants at 49.5 sen, would it still be attractive for YTL Corp holders to buy the warrants on offer?

Let us look at the numbers.

Assuming that you have been offered 1000 units of YTL Power warrants at 20 sen, it would mean you would have to foot out the following:

RM200.00 for subscription
RM10.00 Revenue stamp
RM5.00 bank draft charges.

This will add up to RM215.00

Assuming the price will hold steady say at RM0.50 sen for you to dispose of them  on receiving the warrants.

This will be the academic scenario

Returns: RM500 (Gross)
Brokerage charges : RM30.00
Subscription RM200.00
Returns : RM500-RM245.00 = RM255

This means that you will earn RM255 divided by RM215 =126% returns

Let us assume a 20% price fall of RM0.10 sen.

As almost 95% of the warrants are held by YTL Corp as Treasury buy-ins, there will be more warrants in the market. Expect many to throw out the warrants to take profit on the day they receive the warrants in their CDS accounts.

Returns will then be RM170.00

Return to capital will then work out to RM400-RM 245=RM155

This means the returns will by equivalent to 72%.

Will there be support from YTL Corp to be on the buying end to blunt out the massive liquidation of opportunistic sellers on Day 1?

Knowing YTL Corp, they will set off their buy-back mechanism as soon as they can especially with such a big RM14 billion cash reserve on stand-by.

So, my reading would be YTL Warrants may possibly lose about 5% of value and the warrants will find traction at about 45 sen.

What are the prospects for YTL Power in the near to middle term?

The rumour of October 2011 of YTL Corp taking over YTL Power to merge with YTL Land  to merge them did not take place.

So, what next?

Better Profits 

There are 2 scenarios which I can see.

First, will be the total buyout of YTL Power by YTL Corp to take it private via another share swap using  YTL Corp new share issue.

I believe that YTL Corp will move up in a series of price upticks to RM2.50 and YTL Power may move up to RM2.00 for the swap to take place.

This will occasion the prices of both counters to move up.

YTL Power warrants will also be bought up. At a conversion price of RM1.25, this will yield a gain of 75 sen  per 10 sen warrant. I want to believe that YTL Power warrants will be bought back by YTL Corp at 75 sen. (If this is so, holding the 20 sen specially priced warrant offer should net you 275% returns in the best market scenario)

The second scenario will be a buy-out of YTL Power's Malaysian assets  This will benefit the shareholders of YTL Corp enormously.

The potential buyer would likely by 1MBD.

They have bought Tanjong Energy and Genting Sanyen. They will likely buy out YTL Power's Paka and Pasir Gudang's operations which is up for renegotiation in 2015.  For an attractive sum, Francis will certainly sell out rather than take a lower tariff after 2015.

That will  leave only  Malakoff which will also be taken out to leave only two giants in the energy sector on the  playing field namely Tenaga and 1MDB.

With new cash reserves, expect Francis to buy into more overseas utility companies in the near term.

So, I do see a good stead for YTL Power even if it is taken private without the Malaysian operations.

So,  buying YTL Corp will still be good proxy strategy to tap on the growth potential of YTL Power.

Overseas Acquisitions?