YTL Power Warrant - Got Power?

Based on technical analysis, YTL Power International Bhd's (YTLP) warrants look marginally expensive at their current levels. The warrants were trading at 99 sen each as at the time of writing, while the mother share was at RM2.42. YTLP's warrants have a strike price of RM1.39 and are due to expire on Jan 8, 2020. "Based on the Black-Scholes model and factoring in volatility of 20%, YTLP's mother share price, a risk free rate of 3.44%, the warrants' strike price and time to maturity, it gives me a fair value of 81 sen for the warrant with a gearing of 2.42 times," says OSK Research technical analyst Chan Ken Yew. He says his valuation takes into account YTLP's good dividend yield of 6.4%. It should be noted that the value of a warrant falls when the company offers good dividends. The reason for this is that while the mother share is adjusted for the dividend payout, the strike price remains the same. Chan also says the low volatility is typical of utility stocks. "Companies that posses regulated assets are normally steady in terms of earnings," he explains. Despite the slightly demanding valuations, Chan says there is room for upside if the mother share continues its upward trend. The good news is, analysts are bullish on YTLP, with the majority of research houses calling a "buy" or "outperform" on the stock. According to Bloomberg data, as at Sept 12, CIMB had set a target price of RM3.30 while ECM Libra Avenue Securities' target price is RM2.84. Given that YTLP's share price was RM2.42 as at the time of writing, this implies a potential upside of between 17.4% and 36.4% for the stock. Based on the highest target price, Chan calculates a fair value of RM1.56 for the warrant. "This is inclusive of YTLP's good dividend, and implies an upside of 57.6% from the current warrant price," he says. He adds that even if the stock were to reach ECM Libra's less bullish target price, the warrant would still see some upside. YTLP's mother share closed at a 52-week high of RM2.50 on Sept 6. Its warrants followed suit, closing at a 12-month high of RM1.06 on the same date. YTLP is the global utilities arm of YTL Corp Bhd, and has a strong presence overseas, including in Indonesia and the UK. The company started out as Malaysia's first independent power producer in 1993, and has the distinction of being the country's only "take-or-pay" IPP. Its earnings have shown steady growth (stripping out a series of one-off items), at a mid-single digit rate. "We are projecting modest annual earnings growth over the next three years, fuelled mainly by higher efficiency at its power plants in Indonesia and above-average price hikes for its water concessionaire Wessex Water," says an analyst. Analysts agree that any boost in growth for the company would have to come from merger-and-acquisition activities. This was what happened in 2002, when the group acquired Wessex Water and subsequently saw a substantial increase in earnings. According to Asia Analytica, the company's last acquisition was in 2004, when YTLP purchased a 35% stake in Indonesia-based Jawa Power. "Although the company has high gearing, most of the borrowings are matched to the concessionaire's long-term revenue stream. "The company has gross cash of over RM6 billion that could be used to make new acquisitions when the opportunity rises," states Asia Analytica, an independent research house. Even the recent market turmoil could work out to the company's advantage, according to an analyst with a bank-backed research house. "If there is a liquidity crunch, it could place YTLP in a better position to scoop up deals, given its strong cash position," says the analyst. There have been reports that YTLP is currently eyeing Singapore's Temasek Holdings Pte Ltd's power plants, which the latter is selling in a bid to increase competitiveness in the island state's power industry. "YTLP's experience in the foreign field and efficiently run operations should bode well for its chances in the Singapore market," says the analyst.

source:EdgeDaily