YTLPower ... Dec12

YTL Corp Bhd may have to wait a bit longer before making an offer to take listed subsidiary YTL Power International Bhd private, as the former's share price has come off quite a bit in recent months prior to 18 Dec 2012.

Most believe YTL Corp would take YTL Power private via a share swap, as had happened with YTL Cement Bhd in February 2012, because this would enable the Yeoh family, which has a 55% stake in YTL Corp, to preserve their cashflow and stake at the group level.

YTL Corp's current (Dec 2012) share price level precluded an offer to take YTL Power private anytime soon. YTL Corp and the family would want to maximise their advantage from the share price vantage.

The case for taking YTL Power private lies in the company's cashpile. YTL Power has a cashpile of RM10bil, which YTL Corp will need for large multi-billion-ringgit infrastructure projects such as the high-speed rail project and also for the group's restructuring plans.

YTL Corp managing director Tan Sri Francis Yeoh has also been reported to be interested in acquiring overseas assets.

It would be more meaningful to take YTL Power private first before the other listed subsidiaries not only due to the company's cashpile but also contributions to earnings at the group level. The other listed subsidiaries under the YTL Corp umbrella include YTL Land and Development Bhd, YTL E-Solutions Bhd and Starhill Reit.

While the share swap would not be ideal for realising value for minority shareholders of YTL Power, shareholders should note the possibility of YTL Power turning into a “value trap” if the offer did not materialise.

In the past 12 months prior to Dec 2012, YTL Power's management has reduced the interim dividend per share (DPS) to just a quarter of the previous run-rate, resulting in a significant de-rating of the stock.

Since there were no catalysts for the share price, a re-rating was not in the cards for the future. This probability of YTL Power raising dividends or embarking on accretive acquisitions in the near term is low. Furthermore, the dividend yields of YTL Corp and YTL Power have converged with the decline in the latter's dividends, coinciding with an increase in the former's dividends.

Assuming a swap ratio of one time, there would not be a significant reduction in dividend yields for YTL Power shareholders swapping into YTL Corp shares. However, buying into YTL Power as a cheaper entry into YTL Corp because of the premium that would be offered in the event of a share swap, implying a discounted entry into YTL Corp.