Published on 26 Jan 2022.
RAM Ratings has reaffirmed the AA1/Negative ratings of YTL Power International Berhad’s (YTLPI or the Group) RM5 bil Medium-Term Notes Programme (2011/2036) and RM2.5 bil Sukuk Murabahah facility (2017/2027).
While some business units have seen improvements, we have maintained the negative outlook on our expectations that key business units will continue to be challenged, weighing on the Group’s profitability and dividends/returns generated from these investments. YTLPI’s businesses have been affected by regulatory tightening in the UK water sector and the overcapacity in Singapore’s power sector. The negative outlook also reflects the outlook on YTLPI’s parent company, YTL Corporation Berhad (YTL Corp), in view of the entities’ very close relationship.
Looking ahead, we recognise that divestments may boost the Group’s cash pile and financial metrics in the short term. We have also assumed an indefinite delay in YTLPI’s investment outlay for the Tanjung Jati coal-fired power plant. Overall, 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 YTLPI’s business units will be key to a revision of the outlook to stable, failing which the ratings will be pressured.
In the latest fiscal year, some business units registered improved performances. The Group’s pre-tax profit leapt 49% in FY June 2021 as its multi-utilities business returned to profitability and losses at its telecommunications business narrowed. Adjusting for several one-off items, however, pre-tax profit declined by an estimated 17%, chiefly due to the lower earnings of YTLPI’s water and sewerage business.
From a financial metrics perspective, RAM places more emphasis (although not exclusively) on company-level credit metrics as measured by YTLPI’s operating cashflow (OCF) to net debt coverage ratio. Based on RAM’s stressed assumptions, YTLPI’s stressed OCF to net debt cover is projected to be a thin 0.14 times this year before improving to above 0.25 times in the next two years. The weakness in FY June 2022 stems from lower dividends and higher expenses at the YTLPI company level. Our analysis assumes that the investment outlay to support the Group’s Tanjung Jati coal-fired power plant will be indefinitely delayed while annual OCF, excluding 2022, will come in at around RM600 mil-RM700 mil per annum.
YTLPI’s company-level OCF to net debt coverage ratio trended lower at 0.51 times in FY June 2021 (FY June 2020: 0.61 times) as reduced dividends from its water and sewerage subsidiary, Wessex Water Services Ltd (Wessex), and higher expenses offset lower net debt levels. The ratio nonetheless exceeded our expectations of 0.32 times, given that the Tanjung Jati project had not taken off and dividends from Wessex exceeded our estimates.
YTLPI’s liquidity and financial flexibility remained superior, with unencumbered cash reserves amounting to RM7.81 bil and the robust ecognize net asset value of its operating entities. We ecognize that successful asset divestments may boost YTLPI’s cash pile and company-level financial metrics in the short term but these are transitory and must be accompanied by stronger core profit.
The Group is a diversified conglomerate, operating in three continents and in multiple business lines, with a solid track record in concession businesses.
Karin Koh, CFA
(603) 3385 2508
Davinder Kaur Gill
(603) 3385 2525
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Ratings on YTL Power International Berhad