Is YTL Power running out of ideas?

Buying into YTL Power feels like playing into the game of monopoly. Playing monopoly, you will want to own all the utilities and railroads. YTL Power owns a multitude of utilities businesses except for railroads. Well, YTL, the group does have rail ambitions in connecting Singapore and Malaysia with high-speed train besides partly owning ERL.

Although YTL Power has RM7.5 billion cash in its books, it should not be considered cash rich. Why?

Just look at the 4 segments of businesses under YTL Power:

• Power generation - mainly under YTL Power Corporation in Malaysia, Jawa Power in Indonesia and a 33.5% stake in Electranet, a 200 years concession in Australia.
• Water Utilities - under Wessex Water which it purchased from Enron.
  
• Multi Utilities business under Power Seraya which YTL Power bought from Temasek in 2009. Power Seraya is involved in wholesaling, retailing and also into trading of fuel oil;
• Telecommunication - under the 60% owned YTL Communications which operates the YES wimax business.

Problem of venturing into these businesses is that they are capex heavy. A lot of times, the businesses require heavy initial investments. You can see that all the above businesses require heavy reinvestments one way or another. Its Malaysian IPP concession will end in 2015. So is the Wessex Water's concession - by 2014 (see below note on the water concession). Ending of the concessions may not mean the end of the business, but it probably signals the end of its monopolistic benefits.

YTL Power's multitude of revenue and profit contribution

 
You would expect YTL to be buying assets in times like this due to opportunities arises from crisis. Look at the opportunity it took when buying Wessex Water from Enron in 2002. The purchase of Power Seraya in 2009 for SGD3.8 billion and its venture into the punitive Wimax business in Malaysia however probably halted YTL Power's continuous big M&A ambitions as those ventures probably drained out the group's liquidity. Although the group may have some RM7.5 billion in cash, it is also heavily geared with RM13 billion debt.

If you look at the above segmental information, it has a decent 20% contribution from the power generation business where substantially is contributed from the generous Malaysian IPP concession. YTL Power however cannot rely on that much longer as the concession is ending in 2015. Whether it is to be continued, I am sure the pricing would not be as generous as the current rates and terms it enjoys. With that, YTL Power has to build its cash position. As a result, we continuously see it lowering its dividends as per below chart.

In telecommunication, I expect the "YES" business will not carry YTL Power anywhere as the business it is trying to build on is very very tough with much bigger competitors. Although they did try to introduce a different business model, I do not see much can be done with having that different model. A communication highway is a communication highway. Whoever wins will be from those that can either own both the downstream and upstream business (TM) or those that have scale (TM, Axiata, Maxis, Digi). I do not see YES having that scale. On top of that, with LTE coming on stream, WIMAX does not carry any advantage anymore for YTL as a wireless broadband player.
 

YTL Power's 5 years performance - notice the reducing dividend per share which shows that the company is shoring up its liquid assets to compete in anticipation of ending concessions and tougher competition

On the other hand, if you look at the businesses that YTL Power already owns, its Wessex Water and Power Seraya are the more efficient utilities players. With those, it may not look at expansion via acquisitions but more so into project bidding, pitching on being a more efficient player with know-how and technologies.

Would you however bet on it?

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Note: On Wessex Water

 Water Act 1989 (England and Wales)

In 1989, the Regional Water Authorities were sold by issuing shares on the stock market, with special discounts being offered to the public to ensure political success. Under the Water Act 1989, the newly-floated water-and-sewerage companies (WaSCs) became owners of the entire water infrastructure and properties of the RWAs. The Act gave them 25-year concessions for sanitation and water supply, protected against any possibility of competition. The concessions covered the whole of England and Wales, with the exception that 25% of the population continued to have their water (but not sewerage) supplied by the existing small private companies, now known as water-only companies or WoCs.

Concessions may be terminated by the government,but only by giving 25 years’ notice (extended from 10 years in 2002).