YTLPOWER: 1st Quarter Expectations

With the conclusion of September or 1^st quarter of 2010, YTLPOWER earnings still seem shaky despite the consolidation of Power Seraya (PS)’s contributions. Foreign exchange translation changed directions again with the GBP faltering 5% at the end of Sept compared to end of June to RM5.5679 per Pound compared to RM5.8592 earlier.

The Singapore Dollar (SGD) now play as big a role as the GBP in YTLPOWER’s foreign earnings translations as PS is expected to contribute as much as 30-40% of total net profits of FYE2010. SGD appreciated about 1% at the end of Sept compared to June to RM2.4573. This quarter is also expected to show without any other extra-ordinary write-offs, the ‘new’ normal of YTLPOWER’s earnings and profits.

Due to 2009 year of write-offs coupled with falling GBP exchange, it was bad year in terms of profits for the company. 1^st quarter of 2010 will therefore set a benchmark for the rest of the year for predicting or rather forecasting earnings for YTLPOWER. No doubt it will also give the counter direction preferably upwards throughout the year.

Although historically and statistically, 1^st quarter earnings are always weaker compared to the rest of the year in the past 5 years since June 2003. Only on 2 occasions where the net profits for 1^st quarter was not in last place, which was in 4Q2004 and 4Q2009. Although they did came in 2^nd last. But nevertheless, this coming quarter results will definitely be better than 4Q2009 measly RM9mil net profit.

Challenges Ahead

On the WiMax issue, there is still no clarity from the management. Hopefully the coming AGM can at least answer generally in what way YTLPOWER is involved in this business. I still hold the believe they won’t be directly involved in the operation of the WiMax license nor will they be financing it. Still, the uncertainty about the issue has made at least one research house to downgrade the counter to SELL due to the expected participation in a “risky” business.

Their UK operations Wessex Water (WW) is also feeling some pressure. OFWAT which is the regulatory body of the UK is currently reviewing water rates for 2010-2015 for all water treatment/providers in the country. It has recently drafted a proposal to reduce water rates up to 4% by 2015. Final price limits will be announced in November 2009. From what I read in the news, I expect minimal impact to the bottom line of WW in the near future.

Come 3^rd quarter 2010 will be the interesting part as January is when up to 800mil WA warrants will be due for exercise for conversion to normal share. Expected to generate almost RM1 bil of cash for the company as well as dilute current share value by about 13%. No doubt share prices will be negatively affected and it’ll be interesting to see how management will take care of this. Although the remaining 800 mil warrants can also be exercised before January 2010 and acts as a reminder why share prices are currently subdued.

Question is, will the coming appreciation of EPS from the PS earnings will negate the dillutive effects of the 800 mil warrant conversions?