YTLPOWR (6742) - YTL Power International - Potential 1Bestari cancellation
Target RM2.04 (Stock Rating: ADD)
The call by the Public Accounts Committee (PAC) for the cancellation of the 1Bestari project, as reported in The Star today, is a negative surprise for YTL Power. Still, we estimate that the earnings impact should the Education Ministry cancel the project is not very significant, while a separate report in the Edge Financial Daily quoted the PAC official as saying that the ministry intends to retain the YTL Power unit as contractor despite the shortcomings. As such, we maintain our Add call on the stock, with an unchanged SOP-target price of RM2.04.
What Happened
The Malaysian Public Accounts Committee (PAC) chairman Datuk Nur Jazlan Mohamed was quoted in The Star as saying that the Education Ministry should cancel the RM4.1bn 1Bestarinet school project due to its poorly-delivered first phase. According to the report, the first phase of the project, completed at a cost of RM633m, did not yield the expected results.
What We Think
We think the odds of 1Bestarinet being cancelled given the current scrutiny over the implementation of the project has risen. YTL Power was fined RM2.4m in Nov 2014 when it failed to meet stated targets. The 1Bestarinet project was awarded to YTL Power’s unit YTL Communications in 2011 on an open tender basis. The value of the project is estimated at RM4bn over 15 years. Note that YTL Power's WiMax division is still loss-making; thus the cancellation of the 1Bestarinet project would widen the division’s losses and result in a c.3-4% overall earnings reduction for YTL Power, in our estimation. Our assumption is based on annual revenue of around RM268m and a 10-15% pre-tax margin for 1Bestarinet.
What You Should Do
Although a decision to cancel the project will further widen YTL Power's WiMax losses (which stood at RM128m in 1HFY6/15), we believe the impact on YTL Power’s earnings would not be too significant. Furthermore, a report in the Edge Financial Daily quoting the PAC chairman as saying that the Education Ministry has told the committee that it will stick with YTL despite the project’s shortcomings suggests the solution to cancel 1Bestarinet is not as clear cut as it would seem, even if it puts into question YTL Power's execution on projects, which had been good until now. We maintain our Add call, with an unchanged target price of RM2.04. Our SOP is intact as we have assigned a zero value for WiMax. Assuming the project is cancelled, our EPS will be adjusted downwards, although our Add call will be maintained.
Source: CIMB Daybreak - 19 March 2015
Target RM2.04 (Stock Rating: ADD)
The call by the Public Accounts Committee (PAC) for the cancellation of the 1Bestari project, as reported in The Star today, is a negative surprise for YTL Power. Still, we estimate that the earnings impact should the Education Ministry cancel the project is not very significant, while a separate report in the Edge Financial Daily quoted the PAC official as saying that the ministry intends to retain the YTL Power unit as contractor despite the shortcomings. As such, we maintain our Add call on the stock, with an unchanged SOP-target price of RM2.04.
What Happened
The Malaysian Public Accounts Committee (PAC) chairman Datuk Nur Jazlan Mohamed was quoted in The Star as saying that the Education Ministry should cancel the RM4.1bn 1Bestarinet school project due to its poorly-delivered first phase. According to the report, the first phase of the project, completed at a cost of RM633m, did not yield the expected results.
What We Think
We think the odds of 1Bestarinet being cancelled given the current scrutiny over the implementation of the project has risen. YTL Power was fined RM2.4m in Nov 2014 when it failed to meet stated targets. The 1Bestarinet project was awarded to YTL Power’s unit YTL Communications in 2011 on an open tender basis. The value of the project is estimated at RM4bn over 15 years. Note that YTL Power's WiMax division is still loss-making; thus the cancellation of the 1Bestarinet project would widen the division’s losses and result in a c.3-4% overall earnings reduction for YTL Power, in our estimation. Our assumption is based on annual revenue of around RM268m and a 10-15% pre-tax margin for 1Bestarinet.
What You Should Do
Although a decision to cancel the project will further widen YTL Power's WiMax losses (which stood at RM128m in 1HFY6/15), we believe the impact on YTL Power’s earnings would not be too significant. Furthermore, a report in the Edge Financial Daily quoting the PAC chairman as saying that the Education Ministry has told the committee that it will stick with YTL despite the project’s shortcomings suggests the solution to cancel 1Bestarinet is not as clear cut as it would seem, even if it puts into question YTL Power's execution on projects, which had been good until now. We maintain our Add call, with an unchanged target price of RM2.04. Our SOP is intact as we have assigned a zero value for WiMax. Assuming the project is cancelled, our EPS will be adjusted downwards, although our Add call will be maintained.
Source: CIMB Daybreak - 19 March 2015
