powered by water; new buy - ytlcommunity.com power 20060628... · jawa power. chart 1: ... peers....

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YTL Power International Bhd.

Powered by Water; new Buy

Wessex Water to drive earnings We forecast YTL Power to post 10.8% earnings CAGR over three years (FY06E-FY08E) driven by Wessex Water. The earnings growth in Wessex Water in turn is a result of increase in price limit by UK Office of Water Services (OFWAT), the UK regulator. The limit has been increased by 3%-8.9% for Apr 2005-09.

Potential beneficiary of overseas and 9MP projects YTL Power is proactively seeking to acquire value-accretive greenfield or operating power plants overseas. It is one of the qualified bidders for Peaking Power Generation (1,000MW) in South Africa. We believe YTL Power is an underdog in the local water sector, but its expertise in the UK water & sewerage sector through Wessex Water should prove invaluable in securing Ninth Malaysia Plan (9MP) water-related projects. The 9MP has more than doubled its water utility spending to RM16.5bn (US$4.5bn).

Downward pressure capped by attractive dividend yield YTL Power offers an attractive gross dividend yield of 5.3%, higher than KLCI and regional average gross yield of 4.3% and 3.6%, respectively. Management has the capability to repeat last year’s distribution in the ratio of 1:25 treasury shares, which could potentially lift gross yield by an additional 4% points to 9.3%, backed by its accumulated treasury shares of 239mn.

Resuming coverage; Buy with a blended value PO of RM2.30We are resuming coverage on YTL Power with a Buy rating and a price target of RM2.30, which is based on blended valuation of DFCF and SOP, indicating 22% upside potential. Risks to our forecasts are (1) foreign currency – if RM was to strengthen against the US$ and £ by 1%, earnings would decline by 1.5% and, (2) renegotiation of PPAs – a 1% decline in power tariffs and energy sold could lower earnings by 0.6% and 1%, respectively.

Estimates (Jun)

(RM) 2004A 2005A 2006E 2007E 2008E Net Income (Adjusted - mn) 613 742 821 913 1,009 EPS 0.11 0.11 0.13 0.14 0.16 EPS Change (YoY) 33.4% 7.2% 16.6% 5.5% 10.5% Dividend / Share 0.07 0.14 0.07 0.07 0.07 Free Cash Flow / Share 0.1 0.2 0.1 0.2 0.2

Valuation (Jun) 2004A 2005A 2006E 2007E 2008E P/E 17.7x 16.5x 14.1x 13.4x 12.1x Dividend Yield 3.8% 7.4% 3.8% 3.8% 3.8% EV / EBITDA* 10.3x 9.2x 8.7x 8.3x 7.9x Free Cash Flow Yield* 5.3% 9.7% 7.3% 8.1% 9.0%

* For full definitions of iQmethod SM measures, see page 22.

Coverage Resumed BUY

Equity | Malaysia | Independent Power Producers 28 June 2006

Norly Khalim >> Research Analyst Merrill Lynch (Malaysia) [email protected]

Stock Data Price RM1.88 Price Objective RM2.30 Date Established 28-Jun-2006 Investment Opinion A-1-7 Volatility Risk LOW 52-Week Range RM1.82-RM2.32 Mrkt Val / Shares Out (mn) US$2,583 / 5,066.4 Average Daily Volume 2,534,053 ML Symbol / Exchange YTLPF / KLS Bloomberg / Reuters YTLP MK / YTLP.KL ROE (2006E) 15.2% Net Dbt to Eqty (Jun-2005A) 157.9% Est. 5-Yr EPS / DPS Growth 10.1% / NA Free Float 40.0%

YTL Power In terna t iona l Bhd. 28 June 2006

2

iQprofile SM YTL Power International Bhd. Key Income Statement Data (Jun) 2004A 2005A 2006E 2007E 2008E (RM Millions) Sales 3,387 3,671 3,603 3,802 4,022 Gross Profit 2,002 2,095 2,089 2,203 2,332 Sell General & Admin Expense NA NA NA NA NA Operating Profit 1,499 1,697 1,768 1,854 1,987 Net Interest & Other Income (663) (669) (633) (592) (592) Associates 1 161 257 257 257 Pretax Income 837 1,028 1,155 1,282 1,415 Tax (expense) / Benefit (224) (286) (334) (369) (406) Net Income (Adjusted) 613 742 821 913 1,009 Average Fully Diluted Shares Outstanding 5,757 6,503 6,503 6,503 6,503 Key Cash Flow Statement Data Net Income (Reported) 613 742 821 913 1,009 Depreciation & Amortization 503 559 578 606 602 Change in Working Capital (96) 152 8 (22) (25) Deferred Taxation Charge NA NA NA NA NA Other Adjustments, Net 492 563 545 528 529 Cash Flow from Operations 1,571 1,928 1,695 1,767 1,858 Capital Expenditure (1,064) (1,002) (1,000) (1,000) (1,000) (Acquisition) / Disposal of Investments (119) (780) 0 0 0 Other Cash Inflow / (Outflow) 152 157 97 70 69 Cash Flow from Investing (1,019) (1,610) (903) (930) (931) Shares Issue / (Repurchase) (187) (292) (110) 0 0 Cost of Dividends Paid (325) (337) (365) (365) (365) Cash Flow from Financing 106 421 (1,126) (1,199) (365) Free Cash Flow 507 926 695 767 858 Net Debt 7,843 8,259 8,583 8,709 8,744 Change in Net Debt (41) 311 (317) (473) (563) Key Balance Sheet Data Property, Plant & Equipment 13,976 14,296 14,718 15,112 15,509 Other Non-Current Assets 8 1 1 1 1 Trade Receivables 1,087 1,112 1,092 1,152 1,219 Cash & Equivalents 4,433 4,509 3,534 2,575 2,539 Other Current Assets NA NA NA NA NA Total Assets 20,577 21,906 21,585 21,345 22,039 Long-Term Debt 11,600 11,257 10,606 9,772 9,772 Other Non-Current Liabilities 28 22 22 22 22 Short-Term Debt 676 1,511 1,511 1,511 1,511 Other Current Liabilities 88 120 120 120 120 Total Liabilities 16,016 16,676 16,010 15,222 15,272 Total Equity 4,560 5,229 5,576 6,124 6,767 Total Equity & Liabilities 20,577 21,906 21,585 21,345 22,039 iQmethod SM - Bus Performance* Return On Capital Employed 5.9% 6.1% 6.1% 6.5% 6.9% Return On Equity 13.7% 15.2% 15.2% 15.6% 15.6% Operating Margin 44.3% 46.2% 49.1% 48.7% 49.4% EBITDA Margin 59.1% 61.5% 65.7% 65.2% 64.9% iQmethod SM - Quality of Earnings* Cash Realization Ratio 2.6x 2.6x 2.1x 1.9x 1.8x Asset Replacement Ratio 2.1x 1.8x 1.7x 1.7x 1.7x Tax Rate (Reported) 26.7% 27.8% 28.9% 28.8% 28.7% Net Debt-to-Equity Ratio 172.0% 157.9% 153.9% 142.2% 129.2% Interest Cover 2.2x 2.5x 2.8x 3.1x 3.4x Key Metrics

* For full definitions of iQmethod SM measures, see page 22.

Company Description YTL Power Int'l is Malaysia's first independent power

producer (IPP) and third-largest IPP (after Malakoff & Powertek). YTLP invests in regulated assets operated under long-term government concessions. In 2002, it acquired Wessex Water (a UK water co.) diversifying its asset & earnings profile into power & water. In 2004, YTL Power increased its presence in the region’s power generation segment by acquiring a 35% stake in P.T. Jawa Power.

Stock Data Price to Book Value 1.7x

Chart 1: YTL Power 2006E: EBIT including Associates

Others, 4% M'sia

Pow er, 30%

Wessex Water, 50%

Associates, 14%

Source: Merrill Lynch estimates


3

Investment Thesis Coverage resumed with a Buy Our price objective of RM2.30, based on a blended valuation of discounted free cash flow (DFCF) and sum-of-parts (SOP), represents 22% potential upside. Moreover, we expect YTL Power to pay a cash dividend with a net yield of about 3.8%. Our Buy thesis is based on:

Wessex Water to drive earnings We forecast YTL Power to post 10.8% earnings CAGR over three years (FY06E-FY08E) driven by Wessex Water. Earnings growth for Wessex Water can be attributed to the increase in the price limit imposed by OFWAT, the UK regulator. The regulator granted a 3%-8.9% limit to price increases over Apr 2005-09. Wessex Water contributes an average 61% to YTL Power’s EBIT. Wessex Water is the industry leader although it is one of the smallest water & sewerage companies in the UK, based on 7.2% ROCE vs an average of 5.7% (2004-05) for peers. Currently, most of the listed UK water & sewerage companies covered by Merrill Lynch trade at a premium to its regulatory asset value (RAV) of an average 13%. The premium suggests that this is an opportune time to list Wessex Water. Potential beneficiary of overseas and 9MP projects YTL Power is proactively looking to acquire value-accretive greenfield or operating power plants overseas. It is one of the qualified bidders for Peaking Power Generation (1,000MW) in South Africa, which is expected to come online in October 2008. We view YTL Power as an underdog in the local water sector. However, its expertise in the UK water & sewerage sector through Wessex Water could prove invaluable in securing 9MP water-related projects. The 9MP has more than doubled its water utilities, with spending of RM16.5bn (US$4.5bn). Downward pressure capped by attractive dividend yield YTL Power offers an attractive gross dividend yield of 5.3%, higher than that of KLCI and regional average of 4.3% and 3.6%, respectively. Given that YTL Power has accumulated treasury shares of 239mn, the management has the capability to repeat last year’s distribution of 1 for every 25 treasury shares , potentially lifting gross yield by an additional 4% points to 9.3%.

PO of RM2.30 on blended valuation RM2.30: Using blended valuation (DFCF and SOP methodologies) We are using a blended average of two valuation methodologies (DFCF and SOP) to arrive at a price objective of RM2.30 for YTL Power.

Risk 1: Foreign exchange risk More than 70% of YTL Power’s earnings are derived from the overseas businesses (Wessex Water (£) and Jawa Power (US$)). If the RM was to strengthen against the £ and US$ by about 1%, net profit would decline by approximately 1.5%.

Risk 2: Renegotiation of PPAs Unfavorable changes to the PPAs would have a negative impact on earnings. Nonetheless, these changes would unlikely have any negative impact on the DFCF value. A 1% decline in power tariffs would result in a 1% decline in net profit. Whereas, 1% decline in energy sold would result in a 0.6% decline in net profit.

Chart 2: YTL Power: EBIT segmental contribution

32% 34% 35% 33% 31%

55% 59% 58% 61% 64%

12% 5% 5% 4%7%

0%20%40%60%80%

100%

2004A 2005A 2006E 2007E 2008EPow er Generation Wessex WaterInv estment Holding


Table 1: Water utilities (UK): Premium/discount to RAV Symbol Opinion RAV disc awg AWGPF A-1-7 -4% Kelda Group KELGF A-2-7 10% Northumbrian Water NWGPF B-3-9 14% Pennon Group PEGRF A-2-7 29% Severn Trent SVTRF A-1-7 12% United Utilities UUTPF B-3-8 18% Source: Merrill Lynch estimates

Table 2: Blended valuation Valuation methodologies RM/share DFCF 2.40 SOP 2.21 Average 2.31 Source: Merrill Lynch estimates


4

Wessex Water to drive earnings In 2001, YTL Power took a bold step by venturing into something completely new when it acquired Wessex Water from bankrupt Enron for £1.24bn (RM6.89bn). Post completion of the acquisition on May 21, 2001, the company successfully diversified from its sole reliance on Malaysian power.

The significance of its new acquisition can be felt from its post acquisition full year results in end June 30 2003, wherein Wessex Water contributed 39% to the group pretax income.

Price increase effective over 2005-2010 OFWAT granted Wessex Water a price limit (k) increase of 8.9%, 4.9%, 5.6%, 4.0% and 2.9%, before adjustment for Retail Price Index (RPI) for the period commencing from April 2005 until 2009, respectively. The overall price increase for Wessex Water can be calculated by adding RPI (our forecast RPI is 2.5%) to the awarded price limit increase. We subsequently adjusted the RPI+k to match with Wessex Water’s June year end. We also assumed a marginal 1% increase in volumes to arrive at our estimate for Wessex Water’s revenue increase.

The price increases are intended to compensate Wessex Water for the potential increase in operating and capital expenditure to maintain and enhance drinking water quality and reduce sewerage flooding. Wessex Water is expected to spend approximately £733mn in capital expenditure over the next five years (2006-2010E).

Wessex Water, a wholly-owned overseas subsidiary contributes about 60% of earnings

Chart 3: Segmental contribution - EBIT

50% 32% 34% 35% 33% 31%

39%55% 59% 58% 61% 64%

11% 7% 5% 5% 4%12%

0%20%40%60%80%

100%

2003A 2004A 2005A 2006E 2007E 2008EPow er Generation Wessex Water Inv estment Holding

Source: Company, Merrill Lynch estimates

Chart 4: Segmental contribution - revenue

34% 32% 32% 30% 29%

60% 63% 64% 66% 68%

5% 4% 4% 4%5%

0%20%40%60%80%

100%

2004A 2005A 2006E 2007E 2008EPow er Generation Wessex Water Inv estment Holding

Source: Company, Merrill Lynch estimates

RPI + Price limit (k) = overall price increase

Chart 5: Wessex Water: Price limit & RPI (April)

4.7%

8.9%

5.6%4.0%

3.0% 2.8% 2.5% 2.5% 2.5% 2.5%

3.8%4.9%

0.0%2.0%4.0%6.0%8.0%

10.0%

2004A 2005A 2006E 2007E 2008E 2009EPrice limit (%) RPI

Source: Company, OFWAT, Merrill Lynch estimates

Chart 6: Price & volume growth assumption (adjusted for June)

6.2%

-2%1% 1% 1% 1%

13.4%7.0%

7.7%7.6%10.4%8.6%

6%7.3%

8.8%8.7%11.5%

6.1%

-5%

0%

5%

10%

15%

2004A 2005A 2006E 2007E 2008E 2009EPrice grow th (%) - adjusted Volume Grow th-av erageVolume + Price Grow th (%)

Source: Company, OFWAT, Merrill Lynch estimates


5

EBIT CAGR of 7.4% over three years (FY06E-FY08E) We expect 10.4% and 13.4% growth in EBIT for 2007E and 2008E, respectively backed by the increase in price limit. However, we project flat earnings growth for 2006E, as the unfavorable foreign exchange could likely offset the price increase. RM has strengthened 8.4% against the £ between first 9MFY06 and 9MFY05.

Highest ROCE in the UK water and sewerage industry Historically, Wessex Water is the industry leader in the UK on ROCE. Based on 2004-05 annual results, Wessex Water recorded an average 7.2% ROCE against 5.7% for its peers.

Wessex Water is among the smallest water & sewerage companies in the UK in terms of regulated capital value.

Benign risk profile Wessex Water is protected by strictly enforced ring-fencing provisions, set and regulated by OFWAT. These provisions protect water utility assets in the UK from external shocks, allowing consumers to enjoy uninterrupted water supply whilst enabling owners to enjoy reasonable returns on their investment. For instance, Wessex Water experienced virtually no interruption in its operations and cash flows, as its parent Enron Corporation underwent liquidation.

Chart 7: Wessex Water - revenue and growth

1,000

1,500

2,000

2,500

3,000

2004A 2005A 2006E 2007E 2008E

-5%0%5%10%15%20%

Rev enue Grow th

Source: Company, Merrill Lynch

Chart 8: Wessex Water - EBIT and growth

500700900

1,1001,3001,500

2004A 2005A 2006E 2007E 2008E

-20%0%20%40%60%80%

Profit from Operations Grow th

Source: Company, Merrill Lynch

Smallest RCV, but highest ROCE

Chart 9: 2004-05: RoCE (%)

4.6 4.9 5.4 5.5 5.7 5.8 6.0 6.5 6.6 7.2

2.03.04.05.06.07.08.0

Dwr Cym

ru

South W

est

Souther

nAngl

ian

Severn T

rent

Thames

Northum

brian

United U

tilities

Yorkshi

re

Wessex

Source: OFWAT

Chart 10: 2004 -05: Average RCV (£mn)

-

2,000

4,000

6,000

Wessex

South W

est

Northum

brian

Souther

n

Dwr Cym

ru

Yorkshi

reAngl

ian

Severn T

rent

Thames

United U

tilities

Source: OFWAT


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Should Wessex Water get listed? Currently, most of the listed UK water & sewerage companies covered by Merrill Lynch trade at a 10-29% premium to its RAV, of an average 13% . The premium suggests that this could be an opportune time to list Wessex Water. Its well-known status as a well-managed water & sewerage company in the UK suggests that Wessex Water, if listed, could trade at a premium. To recap, YTL Power bought Wessex Water in 2002 at a 9% discount to Regulated Capital Value (RCV). Table 4: Wessex Water: Earnings estimates and assumptions (£mn) June Y/E 2004A 2005A 2006E 2007E 2008E RCV (£ mn)-March 1,580 1,725 1,834 1,895 1,943 Regulatory Pricing Price limit (%) 3.8% 4.7% 8.9% 4.9% 5.6% RPI 3.0% 2.8% 2.5% 2.5% 2.5% Price growth (%) 7.0% 8.6% 10.4% 7.6% 7.7% Volume Growth-average 5.9% -2.3% 1.0% 1.0% 1.0% Volume + Price Growth 13.4% 6.1% 11.5% 8.7% 8.8% No of staff 1,606 1,716 1,733 1,750 1,768 Staff cost per head 15,504 20,280 21,294 22,358 23,476 Income Statement Turnover (ex VAT) 288 313 349 379 412

Growth 5.9% 8.6% 11.5% 8.7% 8.8% Operating cost 93 104 117 128 140

Growth 4.8% 11.3% 12.7% 9.6% 9.9% EBITDA 195 210 232 251 272

Growth 6.4% 7.4% 10.9% 8.2% 8.2%Source: Merrill Lynch estimates, OFWAT, RAM

Table 3: Water utilities (UK): Premium/discount to RAV Symbol Opinion RAV disc awg AWGPF A-1-7 -4% Kelda Group KELGF A-2-7 10% Northumbrian Water NWGPF B-3-9 14% Pennon Group PEGRF A-2-7 29% Severn Trent SVTRF A-1-7 12% United Utilities UUTPF B-3-8 18% Source: Merrill Lynch estimates


7

Benefit from overseas & 9MP projects Management is keen to participate and on the lookout for tenders offered either on operating or greenfield plants to improve earnings, going forward.

YTL Power, in the past, has been successful in acquiring value-accretive projects. The company has been on an acquisition spree and has acquired ElectraNet, Wessex Water and Jawa Power in 2000, 2002, and 2004, respectively, indicating an average two-year acquisition gap. (Refer to figure 1).

Figure 1: YTL Power - Acquisition trail

Jun-08 Jun-09 Jun-10Jun-04 Jun-05 Jun-06 Jun-07Jun-00 Jun-01 Jun-02 Jun-03Jun-96 Jun-97 Jun-98 Jun-99

May 19971st Infrastructure Project Company Listed in Malaysia

May 2002Acquired 100% in Wessex Water, United Kingdom

Dec 2004Acquired 35% in Jawa Power, Indonesia

Dec 2000Acquired 33.5% in ElectraNet SA, Australia

May 2004Signed SPA for Jawa Power

March 2002Signed SPA for Wessex Water

Oct 2000Signed SPA for ElectraNet SA

2009/2010Expected COD for Sabah 300MW coal-fired power plant

Oct 2008Expected COD for Peaking Power Generation in South Africa

Source: Merrill Lynch estimates, Company

YTL Power could acquire the following projects in the future:

1) Qualified bidder for 1000MW power plant in South Africa YTL Consortium (comprising YTL Power, Kagiso Trust Investment, Yard Capital and Fieldstone Capital Holdings & aloeCap) was one of five IPPs short-listed by the Departmental of Mineral and Energy (DME) in August 2005 as qualified bidders for Peaking Power Generation in South Africa. The final bid for the project is expected to be in September.

The power generation project will comprise of two oil-fired, open-cycle gas turbine power stations, with a combined capacity of about 1000MW at sites in Eastern Cape and KwanZulu-Natal. These plants are expected to be fully operational by October 2008.

The remaining four qualified bidders are: (1) AES Consortium, (2) Inkanyezi Consortium, (3) International Power Consortium, and (4) Tata – J&J Consortium (applied for the Eastern Cape plant only).

2) Bidding for 300MW power plant in Sabah YTL Power has submitted its bid to build, own and operate the 300MW coal-fired power plant in Sabah. This plant is expected to supply power to Sabah and Labuan. It will take approximately three years to complete the construction and commence operations in 2009-10.

Proactive management

1000MW power plants up for grab in South Africa


8

3) Singapore power plants up for sale again? In 2001, as part of a plan to privatize and deregulate the power industry, Temasek Holdings, Singapore’s government investment agency, planned to sell three of its wholly-owned power generation companies, viz., Senoko Power, Seraya and Tuas Power, which in total provide the bulk (74%) of Singapore’s power. In 2002, citing weak market conditions the plan was delayed.

It was reported that Temasek would re-visit the plan after 2004. Although nothing concrete has been announced yet, YTL Power has indicated it keen interest to participate when Temasek re-opens the tender bids. Besides YTL Power, Keppel Energy and SembCorp Power among others have expressed interest; hence intense competition is likely.

One in three chance, given lack of common ownership Assuming that all three generation companies are divested, the possibility of all three having a common ownership appears unlikely. Cross-ownership within the power generation segment would be contrary to the goals of stimulating price-based competition. Thus, the chances of YTL Power venturing into the Singapore power generating industry would be one in three.

Joining a consortia - a better option In order to increase the likelihood of wining the bid for one of the three generation companies, YTL Power could join a consortia led by a local Singaporean partner.

4) Underdog in water-related spending under 9MP We view YTL Power as an underdog in water-related spending under the Ninth Malaysia Plan (9MP). The government has allocated RM16.5bn (US$4.5bn) under the Plan. One of the highest priorities under the Plan is the development of inter-state and inter-basin water transfer. The Inter-State Raw Water Transfer Project from Pahang to Selangor, which will commence construction during the Plan period, is expected to address the increasing demand for water in Selangor, Kuala Lumpur and Putrajaya.

The Malaysian government’s efforts to conserve and improve the quality of existing water resources, as well as identify potential water resources development as a new window of opportunity for companies with exposure and expertise in the water industry. YTL Power is well-positioned to tap this opportunity through its expertise in Wessex Water, in our view. However, YTL Power would only commit itself if the economics of the Malaysian water project met the investment criteria of the group.

Table 5: Singapore - Power generation companies

Licensees

Licensed Capacity

(MW) Type of plants

Senoko Power 3,300 Gas turbine & heat

recovery steam generator Power Seraya 3,100 Oil-fired steam Tuas Power 2,670 Oil/Gas-fired steam SembCorp Cogen 785

Combined cycle gas turbine

Island Power (planned) 800 n.a Keppel Merlimau (planned) 1,400 Oil/Gas-fired steam National Environment Agency 251 Incineration Source: Companies webpage

Chart 11: Singapore - Consumption and generation

29,5

97

31,0

89

31,9

86

33,1

71

3308

9

3466

5

3533

1

3681

0

-

10,000

20,000

30,000

40,000

2001 2002 2003 2004Consumption Generation

Source: Electricity Market Authority

Chart 12: Singapore - Consumption by sector

0

10,000

20,000

30,000

40,000

2001 2002 2003 2004 2005Domestic Manufacturing Others

Source: Singapore Department of Statistics

Water and waste management business is YTL Power’s forte


9

Table 6: Funding for utilities sector under the 9MP and 8MP (RM mn) 8MP expenditure % 9MP expenditure % +/- change (%)Utilities 7,753 100% 16,541 100% 113%Water supply 3,883 50% 8,204 50% 111%Sewerage 1,348 17% 3,133 19% 132%Rural water 734 9% 1,207 7% 64%Flood mitigation 1,788 23% 3,998 24% 124%Source: Ninth Malaysia Plan

Value-accretive projects - sound track record YTL Power has a sound track record of making value-accretive acquisitions, investing in assets with stable, predictable and expected group returns. Hence, any acquisition by YTL Power is likely to be viewed positively by the market. Its latest overseas acquisition, Jawa Power, earned a 20% RoE, higher than our calculated WACC of 13% for Jawa Power.

Jawa Power boosts associates contribution For FY05 and 9MFY06, Jawa Power contributed RM160.5mn and RM184.4mn, respectively to the associates’ level. We forecast Jawa Power to contribute about RM255.9mn to FY06, FY07 and FY08, approximately 14% contribution to YTL Power’s FY06 pretax profit, up from last year’s 9%. Prior to acquiring Jawa Power, contribution from associate level (ElectraNet) was minimal, less than RM1mn a year.

YTL Power acquired a 35% stake in P T Jawa Power and 100% stake in P T Powergen Jawa Timur in December 2004 for US$139.4mn (RM529.7mn). Jawa Power is located at the Paiton Power Generation Complex in the district of Probolinggo on the island of Jawa, Indonesia’s most developed and populated island.

PT Jawa Timur has a 30-year Purchase Power Agreement (PPA), which is to end in November 2030 to sell power to state-owned utility company PT Perusahaan Listrik Negara (PLN). The company commenced operations in 2000. It currently sells more than 80% of its capacity at a tariff of US$46.8/MWh. Coal is sourced from 30-year contracts from domestic coal producers (Kideco, Berau Coal).

Management not expected to compromise on returns

Chart 13: YTL Power - Pre tax contribution by segment

32% 31% 30% 28% 26%

55% 53% 50% 53% 56%

12%4% 4% 4%

9% 14% 14% 13%6%

0%20%40%60%80%

100%

2004A 2005A 2006E 2007E 2008EPow er Generation Wessex Water Inv estment Holding Associates

Source: Merrill Lynch estimates, Company

Table 7: Breakdown - Associates level (RM mn) 2004A 2005A 2006E 2007E 2008EAssociates 1 161 257 257 257

Jawa Power - 160 256 256 256 ElectraNet 1 1 1 1 1

Source: Merrill Lynch estimates, Company, RAM


10

Table 8: P T Jawa Power (US$mn) Year ending June 2004A 2005A 2006E 2007E 2008E Installed Capacity MW 1,220 1,220 1,220 1,220 1,220 Energy sold MWh 9,116 9,475 10,153 10,153 10,153 Capacity Utilized 85% 89% 95% 95% 95%PLN to Pay (US$ / MWh) 46.8 46.8 46.8 46.8 46.8 Income Statement Revenue 437 454 486 486 486 Energy sold 427 443 475 475 475 Minimum Payment 11 11 11 11 11 Operating costs 129 133 143 143 143 EBITDA 309 321 343 343 343 Depreciation (99) (101) (101) (101) (101)Interest costs (47) (47) (47) (47) (47) Pre-tax profit 163 173 195 195 195 Exchange rate: US$:MYR 3.80 3.74 3.74 3.74 Pre-tax -RM 658 731 731 731 Associate reported YTLP - RM mn 160 256 256 256 Equity Stake/contribution to YTLP 24% 35% 35% 35%Source: Merrill Lynch estimates, Company, RAM

Balance sheet ready for another acquisition YTL Power’s gearing looks superficially high, but most of the debt (more than 70% of consolidated debt) is ring-fenced within Wessex Water and does not have recourse to YTL Power. Therefore excluding Wessex Water, YTL Power is in net cash position. Domestically, YTL Power’s only RM borrowing is the RM1.5b @ 10%, a 15-year bond maturing on 14 November 2008 from EPF, of which RM437.5mn is outstanding.

On a consolidated basis, YTL Power has net gearing of 1.4x and cash of RM4.8bn or US$1.3bn as of 3Q06. Table 9: YTL Power - debt composition (RM mn) Year ending June 2004A 2005A 2006E 2007E 2008ENet gearing (x) 1.7 1.6 1.5 1.4 1.3 Total Debts 12,276 12,768 12,117 11,283 11,283 RM 2,610 2,187 1,763 1,338 1,338 GBP 8,160 8,677 8,455 8,050 8,050 US$ 1,456 1,858 1,858 1,858 1,858 EUR 51 47 42 37 37 Debt composition (%) RM 21.3% 17.1% 14.5% 11.9% 11.9% GBP 66.5% 68.0% 69.8% 71.3% 71.3% US$ 11.9% 14.6% 15.3% 16.5% 16.5% EUR 0.4% 0.4% 0.3% 0.3% 0.3% Cash 4,433 4,509 3,534 2,583 2,566 Source: Company, Merrill Lynch estimates


11

Supplementary PPAs - inevitable? The Malaysian government is seriously considering issuing Supplementary PPAs to help Tenaga with its restructuring efforts. We expect the “win-win” comprehensive decision to be announced within six months. Nonetheless, we view the supplementary PPAs could be DFCF neutral.

The Minister for Energy, Telecoms and Post (Lim Keng Yaik) has proposed to re-negotiate the PPAs that govern electricity sales from Independent Power Producers (IPPs) and Tenaga Nasional Berhad (TNB).

Most vulnerable PPAs - expired bonds TNB is seeking to lower capacity payments* to IPPs to aid its restructuring efforts. There is no clear indication on whether the renegotiation would be targeted at all IPPs or just the first generation IPPs, which include YTL Power.

(* All IPPs receive capacity payment from TNB (irrespective of energy sold) except for YTL Power, which is based on a minimum take-or-pay formula. Therefore, for YTL Power, the government could be looking at lowering its energy price per kWh, which is now priced at 15.5sen/kWh.) Although there are no legal grounds for such re-negotiations, all companies that own IPPs, either through direct or indirect holding, also conduct other businesses that rely on government contracts/projects. An outright unwillingness to come to the negotiating table could jeopardize other businesses within that group.

Based on our discussions with parties involved in the PPA revisions, we understand the government is looking to first discuss with IPPs, whose bonds have expired. These are Genting Sanyen and Port Dickson Power.

YTL Power’s total borrowings of RM1.5b @ 10% (a 15-year bond by the EPF) is expected to mature on 14 November 2008, of which RM437.5mn is outstanding. As such, due to this several parties are involved in the negotiations including bonds holders/lenders, YTL Power should be less vulnerable in the renegotiation process, in our view.

Detailed conclusion in six months, at best Indications from government and industry sources point towards PPAs renegotiations between the government and IPPs have recently begun. The government’s August 2006 deadline (to come out with a ‘strong’/’win-win’ recommendation) is rather too optimistic, in our view, considering the large number of parties involved (including politicians, TNB, IPPs, bondholders, etc), balancing TNBs needs and the impact of FDI and complex financial re-engineering.

We believe, at best, the government will only be able to issue an overview/conceptual direction of the supplementary PPAs by August 2006. Subsequently, announce detailed supplementary PPAs in about six months, at best. We see this move similar to government’s National Automotive Policy announcement.

Lower electricity payment compensated with longer concession The government is looking to assist TNB by addressing the (1) capacity payment and/or (2) electricity tariff charge. To encourage the IPPs to accept the lower electricity payments, the government would need to offer compensating terms,

Expired bonds - Genting Sanyen & Port Dickson Power


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which may include lengthening concession periods and one-off payments. The compensating terms would need to have a neutral effect on DCF, at least, in order to encourage IPPs to accept the offer and not to significantly harm the country’s image (so that it does not seem as simply doing away with the legally binding contract).

We believe it is in the best interest of YTL Power to negotiate for a longer concession period rather than a one-off payment, as its PPA will expire in 2015.

DFCF value Neutral; sensitivity matrix analysis On a DFCF basis, the longer concession would offset the lower annual payments. This would be similar to the government lengthening toll road concessionaires’ concessions in exchange for not increasing toll rates.

Experience of other infrastructure companies The government has on previous occasions made changes to the agreements between the government and toll operators. For instance, in the case of KL-Karak Highway, wholly-owned by MTD Infrastructure, the government lowered toll rates from RM5.50 to RM4.00 (for Bentung) and lowered frequency in rates hike from once in two years to once in five years. To compensate KL-Karak highway operator, the government (1) extended concession period by six years, (2) offered a cash payout of RM97.1mn and (3) waived a government loan of RM183mn.

Sensitivity matrix Based on our sensitivity matrix analysis (minimum off take vs. concession period), assuming a worst-case scenario of 20% reduction to minimum capacity supply and only a five-year increase in the concession period, YTL Power’s blended valuation value remains stable at RM2.33. Table 10: Sensitivity Matrix on blended valuation - minimum off take vs. concession period Minimum off take 8940 8195 Base case 6705 5960Concession periods +10 years 2.74 2.66 2.58 2.50 2.42+5 years 2.61 2.54 2.47 2.40 2.33Base year 2.42 2.36 2.31 2.25 2.20-5 years 2.14 2.11 2.08 2.04 2.01-10 years 1.91 1.90 1.89 1.88 1.87Source: Merrill Lynch estimates

Market expectations rather severe The market seems to have assumed that YTL Power would be the most hit from supplementary PPA. Since the government’s announcement of its intention to renegotiate the PPAs, YTL Power share price has declined by 9.5% or 20 sen. Table 11: Share price performance Share price Change Share price 23-Jun-06 9-May-06 sen % 30-Dec-05 YTD (% change)Malakoff 9.60 9.80 (0.20) -2.0% 8.20 17.1%Tanjong 13.30 14.00 (0.70) -5.0% 14.50 -8.3%TNB 9.15 8.80 0.35 4.0% 7.92 15.5%YTL Power 1.90 2.10 (0.20) -9.5% 2.24 -15.2%Source: Merrill Lynch estimates, Bloomberg


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Applying the 20sen decline to our blended value, it seems the market is expecting YTL Power to face a reduction of 2,450MW (or 33%) to 5,000MW on its minimum take/pay or a 3sen reduction (or 19%) to 12.5sen on tariff price (we have not assumed any extension for the concession period), which we believe is rather severe.

Malaysian business not a significant contributor YTL Power might have started its business through acquisition of Malaysian IPP business from its shareholder, YTL Corporation. But over the years, the contribution of pretax earnings from the Malaysian operation has reduced to 30% in 2005 from 50% in 2003, due to overseas acquisitions, including Wessex Water and Jawa Power.

As a result of the growing contribution from overseas businesses, contribution of the local businesses to the DCF value has also lowered. The Malaysian power business accounts for a mere 18% of YTL Power’s blended value.

Stock dividend could boost yield The market was expecting YTL Power to declare a share dividend early this year; nonetheless this has yet to materialize. Management cites the delay to uncertainties in the IPP sector (government’s intention to renegotiate PPAs).

We believe YTL Power is in a position to repeat last year’s distribution ratio of 1 for 25 treasury shares, based on its latest accumulated treasury shares, amounting to 239mn, which represents 4.5% of its shares outstanding. Management has indicated its interest in distributing these shares, but is yet to reveal the exact distribution ratio.

The stock dividend would be an addition to its normal cash dividend of 10 sen per share (net 7.2 sen/share). Including share buybacks, virtually all of YTLP Power’s profit will be paid out as dividend.

Cash dividend - among the highest in the region YTL Power’s normal cash dividend with a 5.3% gross yield is attractive compared to KLCI market average gross yield of 4.3% and regional gross yield of 3.8%.

In addition to YTL Power’s stable and consistent dividend of 10sen/share (gross), the potential share dividend could lift YTL Power’s total gross dividend yield by another 4% points (based on 1:25 distribution ratio) to 9.3%, which is attractive, in our view. It would also place YTL Power at the second highest position in the KLCI and could get ranked as one of the highest in the region.

Earnings forecasts Utility companies typically have low earnings risk, but offer little organic growth, unless there is capacity expansion. This is true for YTL Power, since both its power generation and water businesses are backed by water tight concession terms. We expect earnings improvement from Wessex Water over the next five years, due to a recent increase in price limit for 2005-2010, granted by OFWAT.

Despite the lack of capacity expansion, we expect YTL Power’s net profit to grow by 10.7% to RM821mn in FY06, 11.1% to RM913mn in FY07 and 10.5% to RM1,009mn in FY08, driven by Wessex Water.

Market expects a 33% and 19% reduction in energy sales and tariff price, respectively – rather severe, in our opinion


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YTD reportcard First nine months net profit of RM611mn accounts for 74% of our full year forecast of RM821mn. We believe YTL Power can easily meet our earnings forecast for 2006E.

Year-to-date (YTD), net profit increased by 11% due to significant growth from associates , namely driven by Jawa Power , which was up 161%.

Malaysian power generation segment EBIT grew by 4%YTD supported by 3% growth in revenue while operating costs remained flat for the first nine months.

Wessex Water EBIT increased by 12%YTD, supported by a 7% reduction in operating costs, despite revenue recording flat growth (due to unfavorable foreign exchange). RM has strengthened by 8.4% against the £ between 9M FY06 and 9M FY05.

Where are we different? Our FY06E net profit is roughly in line with consensus forecast of RM834.1mn. However, we are ahead of consensus by 3% and 9% for FY07E and FY08E, respectively. About 45% of market is Neutral on YTL Power due to limited downside, considering given its higher-than-market average dividend yield.

While the market adopts a wait-and-see attitude, we are optimistic of YTL Power announcing another value-accretive project soon. This is supported by the management’s proactive attitude towards finding the right projects.

We are the only ones to have an Underweight on Malaysian regulated utilities. In the AsiaPac utilities space, we Underweight the Malaysian regulated utilities and Overweight the Malaysian IPPs.

PO of RM2.30 – based on blended valuation We are using a blended average of two valuation methodologies (DFCF and SOP) to arrive at a price objective of RM2.30 for YTL Power.

The main difference between the two methodologies used is the way in which we have valued Wessex Water, YTL Power’s wholly-owned subsidiary in the UK. Under the DFCF, we have valued Wessex Water using DFCF methodologies, whereas under the SOP we have used RCV. Table 12: YTL Power - blended valuation Type of valuation methodologies RM/shareDFCF 2.40 SOP 2.21 Average 2.31 Source: Merrill Lynch estimates

Discounted free cash flow Our assessed DFCF valuation for YTL Power of RM2.40/share is calculated using a different WACC rate for each of the business segments. For our cost of equity calculation, instead of using individual country risk-free rate, we have used US 10-year treasuries rate adjusted with volatility country risk premium.

We are confident of management’s ability to source value accretive projects

For Full Report Asia Utilities, dated 19 June 2006

Wessex Water has been valued using DFCF


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Table 13: DFCF (RM mn)

Equity

Ownership DFCF Notes YTL Power-M'sia 100% 3,668 WACC: 7.4%. No terminal value

Wessex Water 100% 14,444 WACC: 7.1%. Terminal growth of 2% (close to RPI)

Jawa Power 35% 2,606 WACC: 12.5%. No terminal value Investment (ST&quoted) 669 Net debt-2005A (June'05) (5,759) 15,629 Diluted Shares mn 6,503 Include warrant & exchangeable bonds DFCF - RM 2.40 Current share price 1.90 Upside 26% Source: Merrill Lynch estimates

SOP methodology The differences in value of our two valuation methods are due to the way in which we have valued Wessex Water. Under the SOP, we have valued Wessex Water using the regulated capital value, which is released by OFWAT. We have also applied a 2.5%- RPI for indexation. Table 14: SOP (RM mn)

Equity

Ownership SOP Notes YTL Power-M'sia 100% 3,668 WACC: 7.4%. No terminal value Wessex Water 100% 13,208 RCV adjusted by 2.5 % RPI multiple by RM6.8/£1 Jawa Power 35% 2,606 WACC: 12.5%. No terminal value Investment (ST&quoted) 669 Net debt-2005A (June'05) (5,759) 14,392 Diluted Shares mn 6,503 Include warrant & exchangeable bonds SOP - RM 2.21 Current share price 1.90 Upside 16% Source: Merrill Lynch estimates

Table 15: Regulated capital value (£mn) RCV 31/03/06 1,792 Indexation 42 Opening RCV 1,834 Capital expenditure 174 Infrastructure renewals expenditure 22 Infrastructure renewals charge (22)Grants & contributions (7)Depreciation (81)Out performance of regulatory assumptions (25)Closing RCV 1,895 Indexation (based on 2.5%E RPI) 47 1,942 Source: OFWAT, Merrill Lynch estimates

For SOP, Wessex Water has been valued using RCV


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Prospective PER in-line with historical YTL Power’s prospective basic PER of 11.7x, is relatively undemanding compared with the historical PER of 13.3x (Dec’99-May’06)

Chart 14: YTL Power: Prospective PE

10

12

14

16

18

Dec-99

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Av g PE= 13.3x

Av g PE - 1 STD = 10.4x

Av g PE + 1 STD = 18.1x


Regional comparison - inline From a regional perspective, although YTL Power’s 2006E EV/EBITDA multiple of 8.8x is higher compared with regional average of 7.7x, its attractive gross dividend yield of 5.3% compensates for the higher multiple. Regional utility companies offer about 3.6% gross yield.

Chart 15: 2006E - Valuations of regional utility companies

CR Pow erChina Pow er NTPC Ltd

YTL Pow er

Tenaga NasionalMalakoff

HKEHuaneng Pow erDatang Intl

Huadian Pow erEGCOMPKEPCO

Chubu Electric

Macquarie Intl

-2468

10

2 4 6 8 10 12 14 16 18EV/EBITDA (x)

Gros

s Yi

eld

(%)


Risks Fluctuations in foreign exchange Our earnings projection is subject to fluctuation in foreign exchange currencies particularly:

Pound sterling (£) since UK-based Wessex Water contributes more than half of its earnings and

US dollar (US$) as Jawa Power contributes approximately 14% to YTL Power’s earnings

Our forward earnings projection is based on exchange rate of:

Net exchange rates for Wessex Water are RM5.67, RM5.69 and RM5.74 to £1 for FY06, FY07 and FY08, respectively, and

RM3.74 to US$1 for FY06-FY08

If the RM was to simultaneously strengthen against the £ and the US$ by about 1%, net profit would decline by approximately 1.5%.


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PPA renegotiation Unfavorable changes to the PPAs would have a negative impact on earnings, going forward. Nonetheless, these changes would unlikely have any negative impact on DCF value.

A 1% decline in power tariff rate would result in a 1% decline in net profit. Whereas, a 1% decline in energy sold would result in a 0.6% decline in net profit.

Low corporate visibility Low corporate transparency is another key risk to our forecasts. We find that YTL Power management’s disclosure is relatively low by Malaysian standards as also compared to other utilities around the region. We would encourage initiatives towards more transparency and more open access to YTLP management and spokespeople.

Financial statement Table 16: YTL Power: Income statement (RM mn) June Y/E 2004A 2005A 2006E 2007E 2008E Notes Revenue 3,387 3,671 3,603 3,802 4,022

Power Generation 1,155 1,158 1,150 1,150 1,150 Energy sold, based on minimum take or pay of 7,450MW @15.4sen//kWh Wessex Water 2,048 2,328 2,303 2,503 2,722 Weaker revenue contribution due to stronger RM against the £ - for 2006E

Investment Holding 183 185 150 150 150 Operating Costs 1,385 1,576 1,514 1,600 1,690

Power Generation 523 483 452 453 453 Lower, due to lower amount of energy sold Wessex Water 860 1,015 986 1,072 1,162 Lower, due to stronger RM against the £ - for 2006E

Investment Holding (2) 80 75 75 75 EBITDA 2,002 2,095 2,109 2,223 2,352

Power Generation 632 676 697 697 697 Wessex Water 1,188 1,313 1,317 1,431 1,560

Investment Holding 185 104 75 75 75 Depreciation (503) (559) (578) (606) (602) Average depreciation rate of 4%

Power Generation 143 152 156 164 163 Wesses Water 360 407 422 442 440

EBIT 1,505 1,547 1,531 1,617 1,750

Power Generation 489 524 541 534 534 Wessex Water 828 906 895 988 1,121

Investment Holding 185 104 75 75 75 Unallocated income 4 13 20 20 20

Interest income 7 11 9 6 6 Finance cost (669) (681) (642) (598) (598) Average interest rate charge of 5.3% Associates 1 161 257 257 257

Jawa Power - 160 256 256 256 Assumed sold 95% of electricity capacity. Refer to Jawa Power section for a more detailed earnings modelElectraNet 1 1 1 1 1

Pre Tax 837 1,028

1,155 1,282 1,415 Taxation 224 286 334 369 406 Net profit 613 742 821 913 1,009 EPS - Diluted 10.6 12.2 13.3 14.0 15.5 Based on enlarged share base of 6,503 shares EPS - Basic 13.3 14.9 16.2 18.0 19.9 Source: Merrill Lynch estimates, Company


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Table 17: YTL Power: Cash flow statement (RM mn) Y/E June 2004A 2005A 2006E 2007E 2008E Net profit 613 742 821 913 1,009 Adjustment Taxation 224 286 334 369 406 Depreciation 503 559 578 606 602 Associates (1) (161) (257) (257) (257)Interest income (111) (122) (97) (70) (69)Finance cost 669 681 642 598 598 Dividend income (80) (68) - - -Loss/Gain disposal PPE 4 (2) - - -Loss/gain Forex (12) (0) - - -Loss/gain investment (4) (13) - - -Deferred income (5) - - - -development exp w/off 7 25 - - -Provision for liability 5 5 - - -Provision Retirement 52 58 - - - 1,864 1,989 2,021 2,159 2,289 Working Capital (96) 152 8 (22) (25)

Receivables (139) 128 21 (60) (67)Payables 57 (9) (16) 45 50

Amount owing (3) 26 - - -inventories (11) 8 3 (8) (8)

1,768 2,142 2,029 2,136 2,265 Retirement benefits (30) (34) - - -Tax paid (167) (179) (334) (369) (406) CF Operating 1,571 1,928 1,695 1,767 1,858 Deve expenditure (15) (25) - - -PPE (1,064) (1,002) (1,000) (1,000) (1,000)Sale PPE 12 15 - - -Grants received 38 39 - - -Acq Subs - (2) - - -Investment Asso - (654) - - -Interest received 112 117 97 70 69 Buy/sale investment (119) (126) - - -Dividend received 1 1 - - - CF Investing (1,034) (1,638) (903) (930) (931) Issued shares 0 66 49 - -Issued bonds 2,283 2,335 - - -Pay/redeem bonds (125) (149) (1,482) (140) -drawdown loans 2,326 1,230 831 (694) -pay loans (3,866) (2,366) - - -repurchase shares (187) (358) (168) - -Interest paid (478) (596) (642) (598) (598)Div paid (325) (337) (365) (365) (365) CF Financing (372) (175) (1,777) (1,797) (963) Net movement 165 115 (984) (959) (35)Source: Merrill Lynch estimates, Company

Table 18: YTL Power: Balance sheet (RM mn) Y/E June 2004A 2005A 2006E 2007E 2008E PPE 13,976 14,296 14,718 15,112 15,509 Intangible assets 441 441 441 441 441 Deve Exp 8 1 1 1 1 Asso 1 775 1,032 1,289 1,545 Investment 445 591 591 591 591 14,871 16,104 16,782 17,433 18,088 Current Asset 5,706 5,802 4,794 3,903 3,942 Inventories 146 138 136 143 151 ST investment 41 42 42 42 42 Cash 4,433 4,509 3,525 2,566 2,530 Receivable 1,087 1,112 1,092 1,152 1,219 Current liabilities 1,547 2,468 2,452 2,498 2,548 Payables 783 837 822 867 917 Provisions liabilities 28 31 31 31 31 post-Ee benefits obligations 0 0 0 0 0 Amount owing holding co 0 0 0 0 0 Amount owing related cos 17 35 35 35 35 taxation 42 53 53 53 53 Bonds 125 125 125 125 125 Borrowings 551 1,386 1,386 1,386 1,386 NCA 4,159 3,334 2,342 1,405 1,395 19,029 19,438 19,124 18,838 19,482 Capital & Reserve Share Capital 2,306 2,498 2,533 2,533 2,533 Reserves 2,254 2,731 3,033 3,581 4,225 Shareholders fund 4,560 5,229 5,567 6,115 6,758 Minority Interest 0 0 0 0 0 Long term Liabilities 14,469 14,209 13,558 12,724 12,724 deferred tax 2,302 2,362 2,362 2,362 2,362 bonds 6,517 8,105 6,623 6,483 6,483 borrowings 5,083 3,152 3,983 3,290 3,290 post-Ee benefit obligations 393 418 418 418 418 Deferred income 145 149 149 149 149 Payables 28 22 22 22 22 19,029 19,438 19,124 18,838 19,482Source: Merrill Lynch estimates, Company


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Earnings dilution We view the likelihood of warrants conversion as relatively high. The exercise price for the warrants is RM1.43 and will increase annually by two sen thereon. Based on the current share price of RM1.88, the warrants are already in the money. YTL Power has 1.09bn unexercised warrants, which will expire in 2010. These are American style warrants, which can be exercised at any time until maturity. If exercised, these warrants will increase the share capital by 20%. The warrants are trading at 7.9% premium and have a gearing of 3x.

YTL Power issued US$250mn nominal value five-year guaranteed exchangeable zero coupon bonds in May 2005. The bonds carry have a yield to maturity of 3.375%, a put option at 110.56% on 9 May 2008, an exchange ratio of RM2.277 (representing around 8% of issued capital, and a 19.8% premium to current share price) and a final redemption price of 118.22%. The proceeds are likely to be used to fund its expansion plans overseas, according to management.

Table 19: YTL Power: Other summaries Y/E June 2004A 2005A 2006E 2007E 2008E Growth Revenue 7% 8% -2% 6% 6%

Power Generation -9% 0% -1% 0% 0% Wessex Water 18% 14% -1% 9% 9%

Investment Holding 10% 1% -19% 0% 0% EBITDA 23% 5% 1% 5% 6%

Power Generation -12% 7% 3% 0% 0% Wessex Water 54% 10% 0% 9% 9%

Investment Holding 43% -44% -28% 0% 0% Profit from Operations 28% 3% -1% 6% 8%

Power Generation -17% 7% 3% -1% 0% Wessex Water 81% 9% -1% 10% 13%

Investment Holding 42% -44% -28% 0% 0% Associates 4% 21882% 59% 0% 0%

Jawa Power 59% 0% 0% ElectraNet 4% 18% 4% 0% 0%

Pre Tax 49% 23% 12% 11% 10% Net profit 37% 21% 11% 11% 10% EPS - Diluted 37% 14% 9% 5% 10% EPS - Basic 36% 12% 9% 11% 10% Margin & Ratio EBITDA 59% 57% 59% 58% 58% Power Generation 55% 58% 61% 61% 61% Wessex Water 58% 56% 57% 57% 57% Profit from Operations 44% 42% 43% 43% 44% Power Generation 42% 45% 47% 46% 46% Wessex Water 40% 39% 39% 39% 41% Effective tax rate 27% 28% 29% 29% 29% ROE 13% 14% 15% 15% 15% ROA 3% 3% 4% 4% 5%Source: Merrill Lynch estimates, Company

Table 20: YTL Power: Other summaries including valuation Y/E June 2004A 2005A 2006E 2007E 2008E Contribution Revenue Power Generation 34% 32% 32% 30% 29% Wessex Water 60% 63% 64% 66% 68% Investment Holding 5% 5% 4% 4% 4% EBITDA Power Generation 32% 32% 33% 31% 30% Wessex Water 59% 63% 62% 64% 66% Investment Holding 9% 5% 4% 3% 3% Profit from Operations Power Generation 32% 34% 35% 33% 31% Wessex Water 55% 59% 58% 61% 64% Investment Holding 12% 7% 5% 5% 4% EBIT including Associates Power Generation 32% 31% 30% 28% 27% Wessex Water 55% 53% 50% 53% 56% Investment Holding 12% 6% 4% 4% 4% Associates 0% 9% 14% 14% 13% Valuation PER basic 14.3 12.8 11.6 10.4 9.4 PER diluted 17.8 15.6 14.1 13.4 12.1 FCF yield 11.0% 9.8% 7.3% 8.1% 9.0% Net dividend yield -cash 3.8% 3.8% 3.8% 3.8% 3.8% EV/EDITDA 7.5 9.9 10.0 9.6 9.0 Source: Merrill Lynch estimates, Company

Warrants: In the money with 3x gearing


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Company description Background YTL Power is Malaysia’s first IPP and the country’s third largest IPP after Malakoff and Powertek. It is listed in the Main Board of the Kuala Lumpur Stock Exchange.

Malaysian power business YTLP currently owns and runs two power plants (1) Paka, Terengannu and (2) Pasir Gudang, Johor. They have a combined installed capacity of 1,212MW, and were successfully connected to the national grid network in 1996. Both the power plants are gas-fired combined-cycle plants with high thermal efficiency and low fuel consumption.

YTL Power’s 21-year PPA with TNB, the owner and operator of the national grid, comes with guaranteed capacity utilization (minimum off take) of at least 7.450MWh at an average tariff of 15.5 sen/kWh of power generated by its two power plants. This guarantees approximately RM1.1bn revenue a year.

Wessex Water – UK business In 2002, YTLP acquired Wessex Water (in the United Kingdom) from bankrupt Enron, effectively diversifying its asset and earnings profile from mere power into power and water, moving a step closer to its vision of becoming a multi-utility company. It provides water services to 1.2m customers and sewerage facilities to 2.5m customers over an area of about 10,000 sq km in the south west of England and operates under a rolling 25-year license granted by the government.

P T Jawa Power, 35% Associates, Indonesia business In 2004, YTL Power grew its presence in the region’s power generation segment by acquiring a 35% stake in P T Jawa Power and 100% stake in PT Powergen Jawa Timur for US$139.4mn (RM529.7mn). Jawa Power is located at the Paiton Power Generation Complex in the district of Probolinggo on the island of Jawa, Indonesia’s most developed and populated island.

ElectraNet, 33.5% Associates, Australia business ElectraNet is a regulated Transmission Network Service Provider that operates and manages the electricity transmission network throughout South Australia. ElectraNet SA owns and operates the 5,566 km transmission network in South Australia under a 200-year lease from the South Australian government. In December 2000, the group completed the purchase of a 33% stake in ElectraNet Pty Limited. A further 0.5% stake was purchased in March 2001, to bring the group’s total shareholding in ElectraNet to 33.5%.

Shareholders YTL Power International is 55.4% owned by YTL Corporation and 8.5% owned by EPF. YTL Power’s latest foreign shareholding is approximately 4%.


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Figure 2: YTL Power: company structure

55.4% 8.5% 36.1%

Associates

100% 35% 100%

100%33.50% 100% preference shares

100%33.50%

ElectraNet Pty Ltd.

YTL Utilities (UK) Ltd.

Wessex Water Ltd.

Wessex Water Services Ltd.

YTL Jawa O&M Hldg. Ltd.

PT Jawa Power PT YTL Jawa Timur

ElectraNet Transmission Service

Pty

YTL Power Investments Ltd.

YTL Power Australia Ltd.

YTL Power Generation S/B

YTL Corp Employees Provident Fund

YTL Utilities Ltd.

Others

YTL Power Int.

YTL Power Finance (Cayman) Ltd.

YTL Power Int. Hldg. Ltd

YTL Jawa Power Hldg. Ltd.

Source: Company, Bloomberg


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Price Objective Basis & Risk We are using a blended average of two valuation methodologies (DFCF and SOP) to arrive at a price objective of RM2.30 for YTL Power.

Risks (1) Foreign currency fluctuations, (2) PPA renegotiation and, (3) low corporate visibility. Analyst Certification I, Norly Khalim, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

iQmethod SM Measures Definitions Business Performance Numerator Denominator Return On Capital Employed NOPAT = (EBIT + Interest Income) * (1 - Tax Rate) + Goodwill

Amortization Total Assets – Current Liabilities + ST Debt + Accumulated Goodwill Amortization

Return On Equity Net Income Shareholders’ Equity Operating Margin Operating Profit Sales Earnings Growth Expected 5-Year CAGR From Latest Actual N/A Free Cash Flow Cash Flow From Operations – Total Capex N/A Quality of Earnings Cash Realization Ratio Cash Flow From Operations Net Income Asset Replacement Ratio Capex Depreciation Tax Rate Tax Charge Pre-Tax Income Net Debt-To-Equity Ratio Net Debt = Total Debt, Less Cash & Equivalents Total Equity Interest Cover EBIT Interest Expense Valuation Toolkit Price / Earnings Ratio Current Share Price Diluted Earnings Per Share (Basis As Specified) Price / Book Value Current Share Price Shareholders’ Equity / Current Basic Shares Dividend Yield Annualised Declared Cash Dividend Current Share Price Free Cash Flow Yield Cash Flow From Operations – Total Capex Market Cap. = Current Share Price * Current Basic Shares Enterprise Value / Sales EV = Current Share Price * Current Shares + Minority Equity + Net Debt +

Other LT Liabilities Sales

EV / EBITDA Enterprise Value Basic EBIT + Depreciation + Amortization iQmethod SM is the set of Merrill Lynch standard measures that serve to maintain global consistency under three broad headings: Business Performance, Quality of Earnings, and validations. The key features of iQmethod are: A consistently structured, detailed, and transparent methodology. Guidelines to maximize the effectiveness of the comparative valuation process, and to identify some common pitfalls. iQdatabase SM is our real-time global research database that is sourced directly from our equity analysts’ earnings models and includes forecasted as well as historical data for income statements, balance sheets, and cash flow statements for companies covered by Merrill Lynch. iQprofile SM, iQmethod SM, iQdatabase SM are service marks of Merrill Lynch & Co., Inc.


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Important Disclosures

YTLPF Price Chart

RM0.00RM0.30RM0.60RM0.90RM1.20RM1.50RM1.80RM2.10RM2.40RM2.70RM3.00

1-Jan-04 1-Jan-05 1-Jan-06YTLPF

B : Buy, N : Neutral, S : Sell, PO : Price objective, NA : No longer valid

26-Sep:NChoong

31-MarJacobelli

10-AugMohamed

23-MayJacobelli

Review Restricted

The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark Grey shading indicates the security is restricted with the opinion suspended. Light Grey shading indicates the security is under review with the opinion withdrawn. Chart current as of May 31, 2006 or such later date as indicated. Investment Rating Distribution: Utilities Group (as of 31 Mar 2006) Coverage Universe Count Percent Inv. Banking Relationships* Count PercentBuy 44 36.97% Buy 22 50.00%Neutral 65 54.62% Neutral 32 49.23%Sell 10 8.40% Sell 3 30.00% Investment Rating Distribution: Global Group (as of 31 Mar 2006) Coverage Universe Count Percent Inv. Banking Relationships* Count PercentBuy 1145 40.29% Buy 393 34.32%Neutral 1474 51.86% Neutral 430 29.17%Sell 223 7.85% Sell 44 19.73%* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.

FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend.

In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale: YTL PowerINTL.

MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company within the next three months: YTL PowerINTL.

The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch, including profits derived from investment banking revenues.


24

Other Important Disclosures

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This research report has been prepared and issued by MLPF&S and/or one or more of its non-U.S. affiliates. MLPF&S is the distributor of this research report in the U.S. and accepts full responsibility for research reports of its non-U.S. affiliates distributed in the U.S. Any U.S. person receiving this research report and wishing to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates.

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