Wednesday, October 26, 2011
I told you that I'm going to spend more time to look into company reports. YTL Power is on my list. YTL Power hit a 3 year low at the beginning of the month. Stock price going back to depressed level of 2008/2009 was really mind boggling. What the hell is happening to this company? Yeah, we have some problems at the macro level but do we need to over-exaggerate the problems as bad as 2008/2009?
I sent Mr. Nosey to go sniff around the neighborhood. Well, well, well. 4G network program was the culprit. As of June 30, their mobile network unit has RM 280 million losses. 280 million losses is a big number babe! I almost wanted to hit shut down button on my computer, have a few packs of whisky and call it a day.
May be not so soon. I decided to give it a second chance since the price has come down by almost 30% and at one point it was almost 40% way down. Found a piece of old news that mentioned YTL is going to spend as much as RM 3 billion over the next 5 years. They probably have spent close to RM 1 billion already.
A lot people have expressed that the mobile internet is getting very crowded. How big is the market? It's kind of difficult to find out the market size as not many analysts talk about them. So, I'll have to put together the jig saw puzzles from various annual reports from TM, Axiata, Maxis, Digi. Digi mentioned there are 4 million mobile internet users. When I added up the numbers from Celcom(857k), Digi(??), Maxis(594k), it was well short. May be they referred to fixed broadband as well. TM has 1.68 million subscribers which I presumed most of them are fixed line broadband users. Adding TM subscribers to mobile broadband is getting closer to 4 million users. Assuming APRU of RM 60/month, the estimated market size is about RM 3 billion. Broadband penetration is about 50% now and assuming we go to 100% in 5 years time, this is probably a RM 6 billion market.
YTL Power plans to get about 400 k subscribers, that will translate to about RM 326 mln revenue based on APRU of RM 68/month. That will be almost 10% market share. Yes I know what you are thinking this is a growth market. Let's assume they capture 20-25% market share 5 years down the road, the revenue will be around 1.2-1.5 billion. At that kind of revenue, it may be able to make a decent margin of 20%. A quarter million 4-5 years down the road? Long gestation, big risk, hyper-competitive market, worth the troubles? I can understand why most people dump their shares. But wait.
Don't the market participants know that YTL Power has a very diversified stream of earnings? Earnings from Malaysia, UK, Indonesia, Singapore, Australia come to nothing? Together, it has about RM 13 billion revenue and RM 1.3 billion net profit before they launch the broadband business. Even we build in the losses, the company will still have RM 1 billion net? I don't see how their dividend of RM 0.12 - RM 0.13/share is going to affected.
Now, putting the bad news aside, how much YTL Power is worth? CIMB tagged a price of RM 2.8/share but RHB thinks it's only worth about RM 2/share.
The key difference is CIMB assigned higher value to Wessex operations -- 1.5X EV/RAB(Enterprise value/regulated asset base). They argued that market is around 1.4X. This premium may be easier to justify during good time. Let's say we don't assign any premium like what RHB did, RM 2/share would be a very fair price.