Published on 07 Apr 2021.
RAM Ratings has reaffirmed the AA1 ratings of YTL Power International Berhad’s (YTLPI or the Group) RM5 bil Medium-Term Notes (MTN) Programme (2011/2036) and RM2.5 bil Sukuk Murabahah facility (2017/2027), while revising its long-term outlook to negative. The outlook revision reflects our expectations that the various challenges plaguing the Group’s businesses may affect the profitability and dividend-paying capacity of its operating entities. The outlook revision also follows a similar rating action on its parent company, YTL Corporation Berhad (YTL Corp), given their very close relationship.
Under our stressed assumptions, YTLPI’s company-level operating cashflows (OCFs) is expected to weaken to around RM450 mil-RM500 mil over the next two years due to lower dividends from its water and sewerage subsidiary, Wessex Water Services Ltd (WWSL), COVID-19-induced delays to the commencement of its Jordanian plant as well as larger advances to its loss-making telecommunications subsidiary. We previously anticipated annual OCFs of about RM600mil-RM700 mil. With the weaker OCFs and the debts to fund the equity portion of its Tanjung Jati project, YTLPI’s company-level OCF-to-net debt coverage ratio is projected to fall to around 0.25-0.30 times over the next two years (from 0.60-0.80 times in the past three years).
On a positive note, YTLPI’s liquidity and financial flexibility remained superior, with RM7.68 bil of unencumbered cash reserves and approximately RM14 bil in realisable net asset value for its operating entities, based on our estimates. The Group is a diversified conglomerate, operating in three continents and in multiple business lines. It has a solid track record in concession businesses.
The Group’s pre-tax profit fell 44% in FY June 2020 (-35% after adjusting for unusual items), weighed down by large losses at its telecommunications business, as well as weaker earnings at its water and sewerage division. The Group had been facing various pre-pandemic challenges stemming from the regulatory tightening in the UK water sector (affecting WWSL), overcapacity in the Singapore power sector (YTL PowerSeraya Pte Ltd), as well as the non-renewal of the 1BestariNet contract for its telecommunications division (YTL Communications Sdn Bhd). However, the Group’s Singapore power generation businesses returned to profitability in 1Q FY June 2021 and stayed in the black in 2Q FY June 2021.
YTLPI and its parent, YTL Corp, have recently embarked on a number of corporate exercises and initiatives that could boost its cash pile and lead to some improvement in their earnings prospects. The successful implementation of these corporate exercises should be accompanied by sustained improvement in earnings/returns on capital employed towards long-term historical levels at both YTLPI and YTL Corp, and sturdy dividends from the core profit of their business units for a reversion of the rating outlook to stable, failing which the ratings will be under pressure.
Karin Koh, CFA
(603) 3382 2508
(603) 3385 2577
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Ratings on YTL Power International Berhad