YTL Power International Bhd

EQUITY FOCUS KDN PP11072/9/2005 22 September 2004 Tursina Yaacob tursina@maybansec.com.my 603-2297 8688 (165630-M) YTL Power International Bhd MALAYSIA EQUITY RESEARCH MAIN BOARD Infrastructure RM1.76 The international multi-utility provider Fair value : RM3.40 BUY CONTENTS A. Executive Summary...1 B. Background...2 C. Prospects...4 D. Concerns...5 E. Earnings Outlook...5 F. Valuation...6 G. Income Statement & Balance Sheet...7 Appendix...8 Share capital (m shares) 2,292.8 Market Capitalisation (RM m) 4,012.4 NTA/share (RM) 1.86 2004 ROE (%) 13.7 2004 Net debt (X) 2.4 Major Shareholders % YTL Corporation Berhad 55.4 Employees Provident Fund 5.6 Bara Aktif Sdn Bhd 5.6 Price Chart (RM1.76) 2.1 1.8 1.5 1.2 Sep 02 Jan 03 May 03 Price Performance 52-week High/Low: Sep 03 Jan 04 May 04 Daily Volume (m) RM1.90/RM1.55 1-mth 3-mth 6-mth 1-yr YTD 5.4-3.3 4.1 8.6 4.8 This report is for information purposes only and under no circumstances is it to be considered as an offer to sell or a solicitation of an offer to buy any securities referred to herein. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified and consequently no representation is made as to the accuracy or completeness of this report and it should not be relied upon as such. Mayban Securities Sdn Bhd and / or its directors may have interests in the securities referred to herein. Any opinions or recommendations contained herein are subject to change at any time. Please refer to the last page of this report for more disclaimers A. EXECUTIVE SUMMARY On the acquisition trail. We understand that YTL Power is still on an acquisition trail after our recent meeting with the management. Based on its past acquisitions, we firmly believe that YTL Power would invest in more regulated-assets. The company s strengths are its 1) predictable and steady cashflow, 2) huge cash hoard, 3) strong management team and 4) attractive dividend yield. We reaffirm our BUY recommendation. Its fair value of RM3.40 per share is almost double its current share price. Earnings boost in FY05. The expiry of YTL Power s supplemental power purchase agreement with TNB in December 2003 has reduced the group s power generation income in FY04. Nevertheless, we are upbeat on the group s FY05 earnings, which should receive a boost from Wessex Water s tariff rate hike and maiden contribution from 35%-owned Jawa Power. Malaysia still offers opportunity. We see potential in YTL Power expanding its operations in Malaysia. Though growth is limited in the power industry, we believe YTL Power, with experience gained from Wessex Water, is eyeing the local water and sewerage concessions. However, YTL Power would only participate once the water and sewerage industry is fully regulated. Undemanding valuations. YTL Power is trading at PER05 and PER06 of 5.1X and 4.6X respectively, which is significantly lower than Malakoff s PER05 of 10X. The company offers a break-up value of RM3.61 per share. This composite valuation is based on a PER of 10X for the power generation (similar to Malakoff s) business, a PER of 10X for the water and waste water business, and a PER of 20X for the electricity transmission operations respectively. Table 1: Earnings Forecast Year End Jun 2003A 2004A 2005F 2006F 2007F Turnover (RM m) 3,182.8 3,386.9 3,388.1 3,730.9 4,040.6 Net Profit (RM m) 603.4 613.5 792.3 887.2 1,037.0 EPS (sen) 26.3 26.8 34.6 38.7 45.2 DPS (sen) 20.0 20.0 20.0 20.0 20.0 P/E Ratio (x) 13.1 6.6 5.1 4.6 3.9 Div. Yield (%) 11.4 11.4 11.4 11.4 11.4 Source: Mayban Securities

B. BACKGROUND YTL Power, which is 55.4%-owned by YTL Corporation, has a significant presence in the domestic power generation sector and owns one of UK s water and waste water company. Chart 1: Core business YTL POWER INTERNATIONAL BERHAD Power Generation Malaysia: Paka and Pasir Gudang power stations Indonesia: 35%- stake in Jawa Power (pending completion) Water supply & waste water services UK: 100%-stake in Wessex Water Services Ltd Electricity transmission services Australia: 33.5%- stake in ElectraNet Transmission Services Pty Ltd Source: Mayban Securities Power generation YTL Power Generation Sdn Bhd (YTLPG) is Malaysia s first independent power producer (IPP) and has a 21-year power purchase arrangement (PPA) (expiry date: 30 September 2015) to supply electricity to Tenaga Nasional Berhad (TNB). YTLPG currently operates base-load power plants using combined-cycle gas turbines in Paka and Pasir Gudang (combined capacity of 1,212MW). Gas for the power plants is supplied by Petronas under the Gas Supply Agreement while YTL Power Services Sdn Bhd undertakes the operation and maintenance services of the plants. YTLPG is the only IPP which stipulates a minimum amount of electricity to be sold to TNB. Under the PPA, TNB is obliged to take or pay for a minimum quantity of 7,450GWh of electricity per annum, representing 70% of the combined capacities of Paka and Pasir Gudang. The PPA also pre-determines the selling price of the minimum quantity of electricity for both power plants at 15.5sen/kWh. The company s latest venture is its proposed acquisition of a 35%-stake in Jawa Power in Indonesia. Jawa Power owns a 1,220MW coal-fired power plant, which began commercial operation in November 2000. The plant is located at the Paiton Power Generation Complex in the district of Probolinggo, Java (Refer to Appendix). Probolinggo is an important transportation center. A major east-west road and railway pass through the city, which is home to a port. Along with the nearby towns of Malang and Pasuruan, Probolinggo produces basic chemicals, clothing, textiles, and food products. The city is a departure point to Bromo Tengger Semeru National Park, home to Bromo, a spectacular crater within a crater that emerged from the caldera of the ancient Tengger volcano. 2 EQUITY FOCUS September 2004

Jawa Power is the second largest operational IPP in Indonesia. Under the terms of the PPA, P.T. Perusahaan Listrik Negara (PLN) is the off-taker for the entire generation capacity and electricity produced by Jawa Power. PLN s obligations under the PPA are supported by the Government of Indonesia, which has issued a support letter to Jawa Power confirming that PLN will honour its obligations under the PPA. PLN s customer base comprises approximately 29.8 million households, businesses and industrial clients. The acquistion of Jawa Power is expected to be completed by end-2005. Electricity transmission services YTL Power also has international presence via its 33.5%-stake in ElectraNet Transmission Services Pty Ltd, which owns and operates the 5,566km power transmission grid for South Australia. ElectraNet operates under a 200-year power transmission concession in the state. Water and waste water In 2002, YTL Power made its maiden investment in the water and waste water industry in UK via the acquisition of Wessex Water Services Ltd. Wessex Water is a utility concession in perpetuity and this significant acquisition represents YTL's first major foray into Europe. Wessex Water serves the south west of England, covering 10,000km 2 including Dorset, Somerset, Bristol, most of Wiltshire and parts of Gloucestershire and Hampshire. The company treats and supplies drinking water to 1.2m people and provides sewerage services to about 2.5m. Chart 2: Area under Wessex Water s jurisdiction Source: Drainage & Water EQUITY FOCUS September 2004 3

C. PROSPECTS Power generation Malaysia s economy continues to grow. Electricity demand in Malaysia is expected to remain strong given the continued economic growth. We expect electricity demand to increase 7.3% and 5.7% in 2004 and 2005 respectively. With the minimum quantity and rate clearly stated in the PPA, YTL Power is slated to receive a minimum revenue of RM1,100m annually from its power plants in Malaysia. Demand for electricity in Indonesia should remain strong. Demand for electricity in the Jawa Island is expected to remain strong. The Jawa and Bali islands constitute about 15% of Indonesia s total area, but are home to 65% of its population and demand 80% of the country s electric energy consumption. East Java boasts a number of Indonesia s leading state corporations such as the state-owned fertiliser and chemical producer, PT Petrokimia Gresik. The state s cement corporation, PT Semen Gresik, is also located in East Java. It has completed a massive plant expansion for export near the port of Tuban on the north-west coast of East Java. In addition, the state s plantations producing sugar, coffee, tobacco and cocoa are also located on the island. Potential from deregulation of Indonesia s power industry. Competition for power generation will be open on the islands of Batam, Java, and Bali by 2007. In 2008, retail competition in the electricity market will begin under the terms of the nation s new electricity law, which was approved in September 2002. The law requires an end to PLN s monopoly on electricity distribution within five years, after which time private companies (both foreign and domestic) will be permitted to sell electricity directly to consumers. All companies will need to use PLN s existing transmission network. We see this as an opportunity for YTL Power to acquire the distribution network and expand its presence in Indonesia. Water and waste water services Likely tariff rate hike. Wessex Water s tariff is due for a review and an increase in tariff should add positively to earnings. Wessex Water has submitted a preferred plan, which limits price increases to 12% above inflation, to the Office of Water Services (Ofwat). The increase takes into consideration the government requirements to advance environmental investment, particularly on phosphorous removal from sewage effluents and low river flow alleviation schemes. Ofwat would determine the final rate in December 2004 following further Ministerial guidance. Nonetheless, we have imputed Wessex Water s 12% price increase in our forecasts (in line with Wessex Water s preferred plan). Steady cashflow stream, highly regulated. Wessex Water's contribution to YTL Power's income will be regular and long-term, as it operates as a regulated "ring-fenced" water company, with tariffs determined by the regulator who has a duty to ensure that investors are able to finance their operations. Opportunities in Malaysia. Investment in regulated assets is YTL Power s strategy and we are comfortable with this approach. With strong financial standing, YTL Power may continue acquiring more regulated assets. Nevertheless, we do not discount the possibility of YTL Power participating in 4 EQUITY FOCUS September 2004

Malaysia s water and sewerage industry. In line with management s previous acquisition strategy, we expect YTL Power to only participate once the water and sewerage industry is fully regulated. Electricity transmission Increasing stake in a mature industry? The electricity transmission in Australia has reached a mature phase of its life cycle where the industry is growing at the same rate as the economy and well supported by a high level of regulation and low government assistance. Therefore, to further increase participation in Australia, we do not discount the possibility of YTL Power increasing its stake in ElectraNet. Other shareholders of ElectraNet are Harold Street Holdings Pty Lld and Hastings Funds Management Ltd. D. CONCERNS Having built its strategy around regulated-assets, YTL Power is exposed to the possibility of changes in regulations. Nevertheless, we are not concerned about the likelihood of a renegotiation of YTL Power s PPA in Malaysia. As a firstgeneration IPP, YTL Power s PPA does not provide for renegotiation of the terms and conditions of the PPA in the event of industry restructuring. On the other hand, the company may lose out should the industry be restructured in a manner that would have benefited YTL Power. Indonesia is facing an electricity supply crisis, with some observers predicting that PLN may be unable to take on any new customers by 2005. Intermittent blackouts are already an issue across Java. Demand for electrical power is expected to grow by approximately 10% per year for the next ten years. YTL Power may need to allocate funds for capital expenditure should Jawa Power plans to expand its capacity. Nevertheless, we believe the investment would be low-risk since PLN is the sole off-taker. E. EARNINGS OUTLOOK The water and waste water division remained the group s main turnover contributor (60.5% of group turnover) while the power generation contributed 34.1% share to turnover. We expect a similar split for the FY05 to FY07 period. However, FY04 turnover from the power generation division fell 8.6%yoy due to the expiry of the supplemental PPA signed in January 2001. Under the supplemental PPA, YTL Power had the right to sell an additional 1,400GWh of electricity per annum at a fixed selling price of 10.9sen/kWh for three years effective 1 January 2001. However, as the supplementary PPA expired in December 2003, YTL Power s electricity sales have reverted to 7,450GWh per annum. Financial year 2005: We anticipate higher contribution from Wessex Water in FY05 given the increase in tariff rate. We have imputed a 12% tariff increase in our forecasts for FY05-06 and 7% for FY07, which is in line with the Wessex Water s preferred plan submitted to the Office of Water Services (Ofwat). The increase takes into consideration the government requirements to advance environmental investment, particularly on phosphorous removal from sewage effluents and low river flow alleviation schemes. We have also included contribution from YTL Power s 35%-stake in Jawa Power and assumed the acquisition to be completed by December 2004. Therefore, FY05 EQUITY FOCUS September 2004 5

PBT would include six months contribution from Jawa Power, which would amount to RM102.1m. YTL Power s stake in ElectraNet is assumed to remain at 33.5% for the FY05-07 period. As FY05 would include a combination of lower turnover from power generation and a six-month impact of Wessex Water s tariff hike, group turnover is expected to increase marginally to RM3,388.1m. Nevertheless, FY05 group net profit is expected to increase by 29.2% to RM792.3m, reflecting the earnings contribution from Jawa Power. Financial years 2006 and 2007: FY06 and FY07 turnover is expected to increase by 10.1% and 8.3% to RM3,730.9m and RM4,040.6m respectively. The group s net profit is expected to reach the RM1b mark in FY07. We have assumed an exchange rate of RM7 per 1 Pound Sterling and therefore, any weakening in the ringgit would reduce our earnings forecast. Balance sheet is expected to remain strong. YTL Power s total debt stood at RM12.3b (94% has been classified as long term borrowings) as at FY04, which translated to gearing ratio of 2.4X. Non-ringgit denominated debt commands 13% of total debt (RM380m in USD while RM1.2b in Pound Sterling). Although its gearing ratio is higher compared to Malakoff s, we are comforted by the stable and predictable cashflow that the business units contributes. The group s total cash stood at RM4,432.7m as at June 2004, translating to RM1.93 per share. F. VALUATION YTL Power s valuation is attractive. The stock is trading at PER05 and PER06 of 5.1X and 4.6X respectively. YTL Power is fairly valued at RM3.44 per share on a straight forward peer comparision as we attach Malakoff s PER05 of 10X to YTL Power s EPS05 of 34.4sen (Table 2). However, given the group s well diversified operations, we have also valued YTL Power on a sum-of-parts (SOP) valuation. This composite valuation is based on a PER of 10X for the power generation (similar to Malakoff s) business, an industry PER of 10X for the water and waste water business and an industry average PER of 20X for the electricity transmission operations. YTL Power is fairly valued at RM3.61 based on the SOP valuation (Table 3). 6 EQUITY FOCUS September 2004

Table 2: Peer comparison Price Mkt. Cap EPS (sen) PER (X) P/BV ROE Debt (RM) (RM m) F1 F2 F1 F2 (X) (%) (X) TNB 11.30 35,174.6 20.3 38.2 55.7 29.6 2.1 6.8 2.1 Malakoff 6.20 5,492.9 63.3 61.3 9.8 10.1 1.9 16.7 1.2 YTL Power 1.75 8,210.0 38.3 39.2 4.6 4.5 1.7 13.7 2.4 Average 23.4 14.7 Source: Mayban Securities, Bloomberg Table 3: Sum-of-parts valuation Net profit FY05 PER Value (RM m) (X) (RM m) Power generation 372.4 10 3,723.9 Water & waste water 380.3 10 3,803.1 Electricity transmission 39.6 20 792.3 Total value 8,319.3 Value per share RM3.61 Source: Mayban Securities EQUITY FOCUS September 2004 7

G. INCOME STATEMENT AND BALANCE SHEET INCOME STATEMENT (RM m) Year End Jun 2003 2004 2005F 2006F 2007F Turnover 3,182.8 3,386.9 3,388.1 3,730.9 4,040.6 Depreciation 447.3 559.0 460.0 509.8 486.9 Finance charges 614.0 621.2 650.0 729.2 702.0 Associates 0.7 0.6 102.7 211.2 217.5 PBT 786.3 843.4 1,100.4 1,232.2 1,440.3 Taxation 182.8 229.9 308.1 345.0 403.3 Net profit 603.4 613.5 792.3 887.2 1,037.0 BALANCE SHEET (RM m) Year End Jun 2003 2004 2005F 2006F 2007F Assets 12,913.6 14,416.2 13,346.6 12,746.0 12,172.5 Development Expenditure - 8.3 - - - Associated companies 0.5 0.5 - - - Investments 263.3 445.4 445.4 445.4 445.4 13,177.4 14,870.5 13,792.1 13,191.5 12,617.9 Current Assets 5,500.6 5,708.0 6,999.8 8,109.1 9,357.4 Stocks 132.3 145.8 148.7 151.7 154.7 Trade debtors 947.6 1,088.7 1,016.4 1,119.3 1,212.2 Cash 4,321.9 4,432.7 5,793.8 6,797.3 7,949.7 ST investments 98.7 40.8 40.8 40.8 40.8 Current Liabilities 2,680.6 1,548.7 1,376.2 1,386.9 1,396.5 Trade creditors 613.5 803.4 643.7 708.9 767.7 Term loans 125.0 525.0 472.5 425.3 382.7 Borrowings 1,838.5 150.3 142.8 135.7 128.9 Prov for liab and charges 24.6 27.8 38.2 38.2 38.2 Tax 79.0 42.2 79.0 79.0 79.0 Net current assets 2,820.0 4,159.3 5,623.6 6,722.1 7,961.0 15,997.4 19,029.8 19,415.7 19,913.6 20,578.9 Financed by: Share capital 2,288.7 2,306.3 2,306.3 2,306.3 2,306.3 Reserves 2,281.7 2,274.6 3,332.0 4,219.2 5,256.1 Shareholders funds 4,570.3 4,580.8 5,638.3 6,525.4 7,562.4 Borrowings 4,963.2 4,183.4 4,141.6 4,100.2 4,059.2 Prov for liabilities and charges 59.6 275.2 32.4 32.4 32.4 Deferred income 137.9 145.3 131.8 131.8 131.8 Payables 24.7 28.8 21.0 21.0 21.0 Long term loans/bonds 4,036.5 7,416.3 7,045.5 6,693.2 6,358.5 Deferred taxation 2,205.3 2,400.0 2,405.1 2,409.6 2,413.5 15,997.4 19,029.8 19,415.6 19,913.6 20,578.8 Source: Mayban Securities 8 EQUITY FOCUS September 2004

APPENDIX East Jawa and location of Jawa Power http://www.info-indo.com/indonesia/java/map_eastjava.htm EQUITY FOCUS September 2004 9

DISCLAIMER General: This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy any securities referred to herein. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or opined in this report. Investors should note that income from such securities, if any, may fluctuate and that each security s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Mayban Securities Sdn Bhd and consequently no representation is made as to the accuracy or completeness of this report by Mayban Securities Sdn Bhd and it should not be relied upon as such. Mayban Securities Sdn Bhd and/or its directors and employees may have interests in the securities referred to herein. Any opinions or recommendations contained herein are subject to change at any time. Investors should understand that statements regarding future prospects may not be realized. This report may include forecasts, which are based on assumptions that are subject to uncertainties and contingencies. The word anticipates:, believe, intends, plans, expects, forecasts, predicts and similar expressions are intended to identify such forecasts. Mayban Securities Sdn Bhd is of the opinion that, barring any unforeseen circumstances, the expectations reflected in such forward-looking statements are reasonable at this point of time. There can be no assurance that such expectations will prove to be correct. Any deviation from the expectations may have adverse effect on the financial and business performance of companies contained in this report. Mayban Securities Sdn Bhd accepts no liability for any direct, indirect or consequential loss arising from use of this report. Definition of Ratings: Mayban Securities uses the following rating system: BUY SELL TRADING BUY/SELL AVOID Price appreciation in excess of 20% expected in the next 12 months Price depreciation in excess of 20% expected in the next 12 months Significant price movement expected in the next 3-months arising from positive/negative newsflow. Eg:- Mergers and acquisition, corporate restructuring, and potential of obtaining new projects. Uncertainty in newsflow. Applicability of Ratings: The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Some common terms abbreviated in this report (where they appear): P = price PBT/PAT = Profit before tax/profit after tax mom= month-on-month PE/PER = price earnings/ PE ratio NTA = net tangile asset yoy = year-on-year PEG = PE ratio to growth NAV = net asset value qoq = quarter-on-quarter FV = fair value EBIT= Earnings before interest, tax ytd = year-to-date BV = book value EBITDA= EBIT, depreciation and amortisation FY/FYE = financial year/ financial year end EV = enterprise value CY = calendar year DCF = discounted cashflow ROE = return on equity capex = capital expenditure FCF = free cashflow ROA = return on asset adex = advertising expenditure CAGR = compounded annual ROS = return on shareholders funds p.a = per annum growth rate EPS = earnings per share WACC = weighted average cost DPS = dividend per share of capital Published and Printed by Mayban Securities Sendirian Berhad (A Wholly Owned subsidiary of Malayan Banking Berhad and A Participating Organisation of Bursa Malaysia Securities Berhad) 7th floor, Mayban Life Tower, Dataran Maybank, No.1 Jalan Maarof, 59000 Kuala Lumpur. Telex:MA 20294 MAYSEC. Fax: 03-2282 5136. General Line: 03-2297 8888 10 EQUITY FOCUS September 2004