AmResearch downgrades YTL Power to Sell

KUALA LUMPUR: AmResearch has downgraded YTL POWER INTERNATIONAL BHD [] (YTLP) from Hold to a Sell with a lower sum-of-parts (SOP) based fair value of RM2.05 a share on concerns over funding risks for the group's WiMax investment.

The research house also said YTLP's share price had risen 25% over the past 12 months and outperformed the 30-stock FBM KLCI by 17%.

"We have lowered our FY10F-FY12F earnings by 6%-7% to impute potential losses arising from the new start-up wireless broadband service (WiMAX - worldwide interoperability for microwave access).

AmResearch said while it was generally comfortable with the group's existing operations in power generation and water/waste management services after a meeting the YTLP management recently.

"But we were surprised by the possibility that YTLP may be used as a vehicle to fund the group's venture into WiMax," it said.

In June this year, YTLP made an inconspicuous announcement that the company was buying a 60% stake in YTL Communications Sdn Bhd (formerly known as Y-Max Infra Sdn Bhd) for a mere RM300,000 - from YTL E-SOLUTIONS BHD [].

YTL group plans to invest RM2.5 billion over a five-year period on launching its WiMax service - with RM1bil to be spent over the first year.

"While no further financial details have been revealed yet, we note that YTLP's capex plans are two times more than Green Packet's proposed outlay of RM1 billion over four years," it said.

AmResearch said it believed the higher capex is earmarked for a greater number of base stations throughout the country to ensure that its WiMax services provide faster access and wider coverage.

Hence, the group likely needs the cash from YTLP to fund the WiMax rollout given YTLE's minimal resources.

"In our view, this is a negative development as YTLP will be extending its business - which provides stable recurring income streams - to uncertain revenues of a TECHNOLOGY [], which has yet to fully kick-off even in developed countries.

"Clearwire Wireless - YTL's technology partner - and Nextwave are currently loss-making and registering negative EBITDA. Green Packet,the first to introduce WiMax in Malaysia, is also suffering losses currently.

"Even with the potential cash outlay, we note that the group's free cashflow of RM2 billion annually could comfortably service its annual dividend payout of around RM500 million. But the potential of a slower than expected take-up or any cost overruns in its WiMax services could possibly constrain the group's acquisitive growth strategy over the longer term," it said.