Will Declining GBP affect YTLPOWER's Profits?

This was a question I raised myself when I first started writing about YTLPOWER. And this question have been cropping up more recently when the GBP started declining vs. the RM. After my initial research much earlier, I gathered that while the GBP might affect their profit, it wouldn't make much of a difference because it would be negated by the change in operational and financial costs as well. So I was initially not worried or cared about the GBP as much. I mean, how much would the GBP drop anyway, right?


But recent sharp decline in GBP value after massive de-leveraging of the Yen carry trades to safer USD has brought the GBP and the rest of the worlds currency much lower much in a short period. The only 2 currency enjoying higher values are the USD and Yen at the current moment. And because of the continuous decline in value, some investors would argue that a direct translation of a weaker GBP vs. the RM means that the net profits and ultimately the EPS would be affected because of a lower GBP value against the RM. Since the EPS is only recorded and updated during quarterly reports, the change will be bigger and hence a lower recorded EPS will be presented in the quarterly report.

In the 1st quarter this year starting July 1 to Sept 30, the GBP value against the RM has drop from RM6.502 to RM6.2254. That is a 4.25% drop in value. From Oct 1 so far to the present, the GBP has fallen as low as RM5.5856 which is 14% drop since July 1st. Now as we know quarterly report will only be announce near end of Nov for the 1st quarter and some are now worried it might be too late to sell then if the results are as bad as they expected with the severe decline in GBP value. And if the 1st quarter results are bad due to currency exchange, then the 2nd quarter would be worse.


Financially Talking


First of all, let's look at the financials of Wessex Water which is 100% owned by YTLPOWER and where the bulk of their profit comes from, also the source of all these worries.



Wessex Waters are primarily financed by bonds with fixed and floating interests rates. Their profits are in GBP and their interest payments for their loans and bonds are in GBP as well. The latter fact is important to note. If you've noticed in Year 2008 after cutting out the operational costs, the interests payable is almost 50% of the operational profit.

Now looking at the figures below, I keyed in the same data in GBP but multiply it by RM6 as well as RM7 to translate these figures into RM or MYR.





Just by looking at the profit figures, it would seem that the lower GBP valuation will cause the Net Profit in this business in RM to drop. If let's say for this instance, in 2007 the GBP was RM 7, and in 2008 it dropped to RM 6. The figures shows us that business is DECLINING by 8.9% !! But then if you look at the figures in GBP, the business revenue and the net profit is actually improving by 7.5% and 6.22% respectively. It's only because of the currency exchange which cause the increase in profit to be wiped out when translated into RM.

If we based our decisions solely on these figures, we would have punished YTLPOWER for a negative business growth, drop in net profits and also drop in EPS which might ultimately affect it's dividend distribution. But is this the entire picture?

While it is true that YTLPOWER's strength lies mainly in it's stable 'growing' business, but since it's dividends are based on EPS and both are paid in Ringgit, a weaker conversion of GBP to RM will cause the EPS to fall instead of an increase which it is in GBP at least. So while the business is actually growing and more revenues are recorded in GBP, it is just not reflected in RM side of accounting due to weaker currency conversion. If we look at the accounting in GBP and make our decision, we would think the company is all good which is true, but if translated to RM accounting, the company will look bad which is actually showing the state of the economy of UK.

So the question remains, if the company is good and growing but the country is going through bad times, is it still prudent and advisable to invest in the company? Personally, I would because it is considered a gem in the rough. But it is ultimately up to investors how they want to interpret it. Everyone wants to make money without any risks, and if they think the risks of doing business with YTLPOWER have increase, they will rightfully take their money out.

Economy Risks

Now when I talked about the economy, I'm speaking from a layman's perspective and how I look at it and how I think it will transpire in time to come. When I look at YTLPOWER and the profits and the debts and the economy in general, I don't have un-easiness that I would have if let's say I own stocks in the car industry or airlines. Simply because it is dealing with the essentials of the way we live. These aren't luxury industries, these product they are selling, maintaining, providing and producing are bare essentials of living. Because of that, they aren't going to go out of business anytime soon, maybe affected but not out of business.

Secondly I look at how their competition will perform and how it will affect them and realise that since they run under contracts/leases from the government and own concessions, it is basically sort of a profit guarantee as long as you don't blow up your shop.

Thirdly, their ability to service their large debts are helped by their steady, non-cyclical business revenues. The fact that the world economy are in shatters also help in some way because of the lessening of the interests to loans, their floating debts can be more 'cheaper' in a sense of interest accrued.

Their ability to pay dividends would probably rank up one of the highest worry at this current scenario due to lessening GBP value against the RM. Dividends is what people buy this stock for. Not capital appreciation. So as long as the dividends keep rolling, people will keep holding.

Overall, the stock is still a favourite to dividend players like me. About the only excitement you can get from this counter is the possibility of an acquisition of some other foreign company to add to their fold.