Wednesday 21 Feb 2024
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This article first appeared in The Edge Malaysia Weekly on February 21, 2022 - February 27, 2022

DATUK Yeoh Seok Hong, the managing director of YTL Power Bhd (YTLP), was in a cheerful mood when he met The Edge at his office at Menara YTL, the new headquarters of the YTL group founded by his late father Tan Sri Yeoh Tiong Lay.

The office block is less than 1km from its previous headquarters, Menara Yeoh Tiong Lay, on the bustling Jalan Bukit Bintang in the city centre.

His upbeat mood is understandable as YTLP recently struck a deal to sell its 33.5% stake in Australian-based power transmission firm ElectraNet Pty Ltd for A$1.02 billion (RM3.05 billion) cash.

“We are in the thick of the action,” Yeoh tells The Edge.

Yeoh, 63, admits that YTLP might not be as exciting as the tech start-ups that are listing at exorbitant valuations, but still, the group is growing its utility business and unlocking asset value at multiples when presented with the opportunities.

He sees the sale of the Aussie power transmission firm that YTLP bought 21 years ago at four times its carrying value as a testament to YTLP’s strategy — owning regulated infrastructure assets that appreciate in value over the years.

Both of its regulated assets, ElectraNet and UK’s Wessex Water Services Ltd, were acquired at bargain prices.

Its stake in ElectraNet was acquired in 2000 and was the first foreign purchase by a Malaysian company after the 1998 Asian financial crisis. Whereas Wessex Water was acquired from Enron Corp in 2002, some time after its bankruptcy and financial scandal unfolded.

“We are going into a high inflation regime. These are the best store-value assets in such periods as the asset value moves with inflation,” Yeoh notes.

Besides having the foresight and a sizeable war chest to invest in the right regulated assets, patience is required to reap the fruits of these investments.

Last year, YTLP closed a chapter on its foray as a first-generation independent power producer at home when its second power purchase agreement for 585mw from the Paka gas-fired power plant expired.

But YTLP is not exiting the energy business. In fact, the group is strengthening its foothold in the power sector across the Causeway.

Singapore, an energy-hungry nation that does not have much fuel to generate its own electricity, is speeding up its transition to green energy. Yeoh believes that will be a good platform for YTLP, which owns a power generation firm — YTL PowerSeraya Pte Ltd — to jump on the green energy bandwagon catering to ESG-conscious companies such as data centres and environmentally conscious domestic users there.

“Given the current cost of living in Singapore, they can afford to consume renewable  energy, which tends to cost more,” says Yeoh.

The Singapore government in October appointed YTL PowerSeraya to carry out a two-year trial run to import 100mw of non-renewable power from Malaysia, alongside another 100mw each from Indonesia and Laos through other companies.

It is worth noting that the Energy Commission (EC) on Oct 24 issued an updated Guideline on Cross-Border Electricity Sales (CBES), stating that the transfer of electricity to Singapore has to be non-renewable energy, and it should not exceed 100mw. Furthermore, the power has to be transmitted through the existing interconnection only.

It would be interesting to observe how and from where YTLP would generate green energy to supply to Singapore.

YTLP’s unit, YTL Data Center Holdings Pte Ltd, acquired Dodid Pte Ltd, that owns a 12.5mw tier-three data centre in Singapore, last year. YTL Data Center Holdings is working closely with YTL PowerSeraya and its retail arm Geneco on green energy solutions to enable the data centre to be run on renewable energy. This is the second data centre it owns, after the one in Sentul, Kuala Lumpur.

YTLP’s 70%-owned unit SIPP Power Sdn Bhd signed a sale and purchase agreement to buy 664ha of oil palm estates in Kulai, southern Johor, from Boustead Plantations Bhd to build a 500mw solar capacity facility and data centres. The remaining 30% of SIPP Power is owned by SIPP Energy Sdn Bhd, which is controlled by former Umno Kota Tinggi division chief Datuk Daing A Malek Daing A Rahman.

The RM428.8 million land acquisition is expected to be completed this quarter.

The group’s operation in Singapore is its biggest revenue contributor, accounting for 56% of its total annual revenue of RM10.78 billion, followed by the UK, at 35%.

Meanwhile, YTLP is at its last mile in acquiring another power producer, Tuaspring Pte Ltd, in Singapore for S$331.45 million via cash plus shares in YTL Utilities (S) Pte Ltd, the immediate holding company of YTL PowerSeraya.

The completion of the takeover is conditional on the Public Utilities Board of Singapore’s approval.

Besides power generation, YTLP is one of the electricity retailers in the island republic. Its retail brand, Geneco, has a 13.8% share of the retail market, comprising the residential, commercial and industrial sectors.

YTLP’s crown jewel is the UK’s Wessex Water Services Ltd, which has a regulatory asset base (RAB) of £3.36 billion (RM19.31 billion).

YTLP is a controlling shareholder of the YES 5G mobile network as well.

The group is banking on the Malaysian government’s adoption of the single wholesale network model on 5G rollout that allows all telcos equal access to the mobile network infrastructure. Yeoh is looking forward to a new landscape in which telcos are competing on quality customer service and product innovation instead of the amount of spectrum in hand (see “Single wholesale network or nothing, says YES”).

Elsewhere, in Jordan, YTLP holds a 45% stake in a 554mw shale oil plant, which is expected to be commissioned this year after a delay caused by the Covid-19 pandemic.

In Indonesia, YTLP has a 20% stake in an operating 1,220mw coal-fired plant. It also has an 80%-owned, 1,220mw coal plant project which, according to Yeoh, is facing headwinds owing to the global green energy agenda.

Ready to acquire assets in high interest rate era

On YTLP’s sale of its stake in ElectraNet, Yeoh says: We think it is time for us to take the money [from the disposal of ElectraNet] and look at more opportunities. We think green energy is the way to go.

“You [may surmise that] if we already have so much cash, why do we want more cash? I think the tightening of the market is coming, inflation is coming, and the [lockdowns are] going to be over.

“A lot of distortion in the market is going to happen. [There will be] highly geared companies … Everybody is going to be in a different world. I think we should be ready for that.” Yeoh seems to imply that YTLP is building its war chest for more acquisitions.

The market, however, does not seem to be excited about the divestment that will instantly add RM3.05 billion to the group’s coffers, which will balloon to about RM11 billion. The group’s net gearing is currently at 1.6 times, with total borrowings of RM28.32 billion, excluding the latest asset sales.

Since the proposed divestment, YTLP’s stock has risen roughly 7% or 4.5 sen to 64.5 sen. Its share price is well below the indicative net book value of RM1.59 per share, which is yet to book in the cash proceeds.

The sale will add RM2.2 billion or 27 sen per share to YTLP’s books. Based on a price-to-book value of around 0.4 times, YTLP seems to be one of the cheapest utility stocks in the market.

“I think it is important for our analysts and investors to understand the nature of our business and how we value the company.

“The fact of the matter is that you have to look at our track record. We are a conservative company. We keep a very strong balance sheet. We create good assets that sell in [high] multiples,” says Yeoh.

Eight of the 11 analysts who cover the group have “buy” recommendations, with an average target price of 76 sen, according to Bloomberg.

However, in the race for high returns, it is a tough sell for long-term utility asset plays, as patience is required of investors. This is particularly the case for portfolio fund managers, whose performance is being assessed on an annual basis, if not shorter term.

YTLP’s share price has fallen from RM1.13 in 2017 and traded around the current levels since the pandemic.

Since the financial year ended June 30, 2017 (FY2017), YTLP’s dividend has halved to five sen per share, compared with 10 sen per share for the better part of the last decade.

The weak interest in the utility group is partly due to its low dividends amid shrinking profits and heavy capital requirements, according to analysts.

For FY2021, YTLP posted a net loss of RM146.5 million compared with a net profit of RM67.63 million the year before. Revenue was slightly higher at RM10.78 billion versus RM10.63 billion in FY2020.

The net loss was attributed to the deferred tax expenses arising from the increase in the UK corporate tax from 19% to 25% effective April 1, 2023. The deferred tax charge gave rise to a debt of RM540.5 million in its profit and loss accounts for FY2021.

With the energy transition, players in the energy sector have begun to tap into renewable energy as an area of interest. Having played numerous roles as a first mover in the past, it will be interesting to see how YTLP will position itself in the green energy space for future growth.


Single wholesale network or nothing, says YES

With all the debate on the right model for the 5G network infrastructure in Malaysia, YTL Power International Bhd (YTLP) sees the single wholesale network (SWN) as “the best thing in the country”.

This is because it allows service providers to focus their resources on innovations and providing better solutions, says the utility firm, which holds a 60% stake in mobile network operator (MNO) YES.

Industry leaders have pushed back, with the CDMU (Celcom Axiata Bhd, Digi.Com Bhd, Maxis Bhd and U Mobile Bhd) announcing on Feb 18 they have submitted a proposal for a second 5G wholesale provider.

However, YTLP managing director Datuk Yeoh Seok Hong says this “does not work”.

“Why do you need dual [wholesale providers]? Might as well go back to the previous model,” Yeoh says in an exclusive interview with The Edge.

“It is either single or nothing. [SWN] is the cheapest [model], it is provided by the government, it is the fairest to everybody. It is as simple as that.”

Under the SWN, one 5G infrastructure owned by the government through Digital Nasional Bhd (DNB) will be leased out to all MNOs.

The plan is a shift from past practices where each MNO operates on its own infrastructure, which resulted in overlaps and gaps in coverage.

The weakness of the previous model is seen in the gaps left behind upon the cessation of 3G this year, where 4G coverage often drops to E (Enhanced GPRS) even though 4G was introduced a decade ago.

Notably, the government is now spending its own funds to roll out sufficient 4G nationwide coverage under the Jendela programme to compensate for the gaps.

“Let’s face the fact — Celcom wants to merge with Digi.Com, what does that mean? You are cutting down [and pooling resources]. Why is SWN so bad if you do not have to come up with more money?” Yeoh asks.

The Celcom Axiata-Digi.Com merger was announced in 2021 to address competition in the heavily penetrated market, amid capex pressures to meet consumer demand.

“Malaysia’s next engine of growth will be very dependent on digital and the foundation that is driving it, and 5G will be a very important driver for that,” he adds. “They (DNB) must have the determination to build it fast.”


Things turning for YES

Thus far, only YTLP and Telekom Malaysia Bhd have subscribed to DNB’s 5G infrastructure.

Yeoh opines that the industry view is for 5G to become a premium product relative to 4G, but says YES will go to 5G “as fast as DNB can build it”.

“Our emphasis will be to invest in finding solutions and products to win this market,” Yeoh says.

“We started with that [approach], where we saw the need for a solution to digitise the education system in Malaysia [through e-learning and 4G]. And we like that challenge,” he adds.

For the industry, the challenge for 5G roll-out also lies in consumers’ investment costs as they upgrade their devices from 4G to 5G.

“That can only be done if the cost by DNB on the network is cheap enough for [players] to be able to come up with plans that can finance the public with devices,” says Yeoh.

Yeoh also brushes off concerns about the potential change in the roll-out model, with the Ministry of Communications and Multimedia and the Ministry of Finance slated to present a Cabinet paper on the nationwide 5G roll-out.

“As far as we are concerned, we have a deal with DNB. Unless it changes, there is no change in our mind,” he says.

The telco division was a key drag on YTLP’s performance over the years. Up until a year and a half ago, YES’s pure 4G network had been absent of a low-end spectrum, which Yeoh says influences the quality of its line coverage.

Operationally, the situation has improved — YES now covers 90% of the population, and was the third best MNO in terms of average download throughput and average latency in 2020, according to the Malaysian Communications and Multimedia Commission (MCMC).

It is also not affected by the 3G retirement as it does not have legacy 2G/3G networks.

YES’s reported subscriber base stands at 2.36 million, as it helped equip 800,000 subscribers with gadgets and internet connectivity under the Prihatin programme during the Covid-19 lockdowns. Will they remain on the network?

“Now, people are beginning to feel that the YES network covers quite well. It is a national network, not a sporadic network like it used to be. So the next thing is marketing and innovating our products,” says Yeoh.

One example is free 5G SIM cards provided for clients to test the network until end-March, which Yeoh says the take-up has been “fantastic”.

“We’ve got a few things up our sleeves. Hopefully, we can come up with something and this is a beginning of a change in understanding what YES is all about,” Yeoh adds.


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