YTL Power International Bhd’s proposed purchase of Singapore’s PowerSeraya Ltd looks unattractive from the earnings record of the latter. It was announced on Tuesday the YTL Power group will purchase the entire equity of PowerSeraya, owner of two power stations that has 25% of Singapore’s electricity generation capacity.
The price for PowerSeraya is S$3.4bil (RM8.09bil) and the assumption of a S$200mil debt that owner Temasek Holdings Ltd owes the former. As the debt is owed to a company that will become YTL Power’s wholly-owned subsidiary, it is believed the debt can be cancelled.
The acquisition is expected to be completed in the first half next year and in its first full year of contribution in 2010, PowerSeraya is projected to produce a net profit of RM76mil, YTL Power said. That translates into an earnings per share contribution of 1 sen for YTL Power, the company added.
That sounds miniscule for an investment outlay of S$3.4bil. It should be noted, however, that PowerSeraya’s net profit was much higher at S$218.3mil for its year ended March 31 (FY08). The reason for the wide fluctuation in its profitability is not known.
It could be due to factors such as scheduled maintenance shutdown at a certain period. PowerSeraya’s earnings in FY08 would be a return of 6.4% on YTL Power’s purchase price. The free cashflow from PowerSeraya should exceed that because depreciation, a large non-cash item, would have been deducted to arrive at the profit figure.
In addition, PowerSeraya is constructing two 379MW cogeneration units that will be operational in 2010, which will expand its revenue-generating capacity. Power project investments are premised on free cashflow of the acquired assets being used to repay loans taken to finance the acquisition.
YTL Power said the PowerSeraya purchase will be funded by S$1.15bil from the former’s cash reserves and S$2.25bil from a loan.
Outlining a scenario, an investment banker told StarBiz yesterday that if YTL Power took a 10-year loan for S$2.25bil, half of that would be repaid in five years from PowerSeraya’s own cashflow. At that time, S$1.125bil of debt would have been repaid and become equity for the YTL Power group.
In 10 years, the entire loan would have been repaid and YTL Power would then own PowerSeraya with the entire debt repaid. Effectively, YTL Power would have gained an equity value of S$2.25bil by then.
That’s a huge sum in equity value, although it’s not an acquisition primed for high growth. The objective is steady, assured wealth creation. Furthermore, YTL Power is not getting PowerSeraya at a distressed sale price because Temasek is not in any form of distress. The word on the street is the internal rate of return (IRR) - the return to be earned on invested capital - for PowerSeraya is about 10% or in the low teens.
For a richer IRR in the mid-teens, YTL Power will have to trawl further afield for distressed asset sales which, no doubt, it is working on.
