It is for sure that KKR will use heavy leverage to buy the 25% equity stake in Northumbrian. For a top class asset like Northumbrian, I think KKR could get 80%-90% debt financing for the stake purchase.
Being a PE investor, KKR obviously is taking advantage of the weak pounds sterling and the still low interest rates in the US to bet on a strong rebound in pounds sterling few years later. As from asset operations wise, I am not sure how much KKR could squeeze out of it besides the expanding RCV. One possibility is that KKR may see lower capex requirement than what Northumbrian has budgeted for the 2021-2025 regulatory period, hence potential higher dividend payouts. Northumbrian gearing is already at 69.8% close to the max 70% allowed, so there is little room for capital management to squeeze out more cash.
I can only think of the above 2 possible reasons. Perhaps KKR saw something we don't.

From currently on parity with the USD, if pounds sterling appreciates back 30% to 1.30 against USD, KKR would be getting (4.9% x 4 ) x 1.3 = > 25% returns in 4 years

As water companies in the UK are experiencing high inflation and high capex phase, an investment holding company from Asia (eg. CK group) may find the 4.9% equity return low compared to potential opportunities in Asia or other emerging markets. But for a US or western fund, a 4.9% equity return would be decent compared to its low borrowing costs. Furthermore, KKR is buying into Northumbrian when pounds sterling is trading at decades low compared to US dollars. With its RCV increasing over time, Northumbrian would be worth a lot more few years later when pound sterlings appreciates against the US dollars.

I am sure Mr. Li or CK group would have evaluated the deal thoroughly and weigh it with any higher return it could get elsewhere, compared to a 4.9% equity return it would get from Northumbrian Water should it continue holding onto it

Whether a water asset in the UK should be valued at 1.04 - 1.08x RCV or 1.50-1.60x RCV, it ultimately bores down to how much an investor would get in terms of equity cashflows relative to its borrowing costs.
That is why I always like to check it from cashflow perspective if a deal would make sense.

I hope I have not made any fatal mistake in the calculations above. Pls help me to check through the calculations and arguments above.
If the above calculations are right, then the latest KKR deal in Northumbrian Water would simply reinforce my conviction that Wassex Water would be valued at 1.50-1.60x RCV, which means YTLPower is very very much under-valued.

Assuming the £246.3m capex was 70% funded by debts, then equity cashflow would be reduced by 73.9m pounds and hence cashflow yield would be £137.3m / £3,141m = 4.4% which would be still higher than US 30-year bond yield of 3.10%

At equity value of £3,141m, potential investors in Wessex would be getting cashflow yield of £211.2m / £3,141m = 6.7% which is not too far off from the 6.9% KKR will be getting from Northumbrian Water

If at 1.53x RCV that KKR is paying for Northumbrian Water, Wessex would be valued at 1.53 x £3,566m = £5,456m on Enterprise Value (EV).

Minus off net borrowings of £2,315m, the equity value of Wessex would be £5,456m - £2,315m = £3,141m or RM17.2 billion or RM2.10 per share of YTLPower

YTL Power only paid 544m pounds for 100% equity value of Wessex Waters in 2002 or at 16% discount to RCV then. Wessex's RCV has increased by 142% from 1,£1474m in 2022 to £3,566m in 2022.
The discount YTLPower paid in 2002 would make a big difference in determining how much returns it will make from Wessex

As for returns to Li's CK group, it does look like a lower-than-expected return of 3,468m/2,400m or 44.5% returns in 11 years. I guess it all depends on the valuation Mr. Li or CK group paid for Northumbrian Water back in 2011. It might have paid for it at also 1.5x RCV then so it has only benefitted from the organic growth in RCV of Northumbrian Water in past 11 years.

It we look at the deal from cashflow perspective, KKR is getting quite a reasonable deal. Northumbrian reported operating cashflows of £239.5m before capex for FY2021.
Hence the equity money it is paying would be getting 239.5/3468 = 6.9% equity cashflow yield which is not bad.
Assuming the capex of £231.5m for FY2021 would have been funded 70% by debt, equity funding of the capex would have been £69.45m reducing equity cashflows to £170.05m or equity cashflow yield of 4.9% which is still decent relative to US short-term borrowing costs of 1.75% currently or US 30-year bond yield of 3.10%

Observatory, thanks for highlighting the KKR deal in Northumbrian Water. KKR is paying £867m for 25% equity in Northumbrian Water, valueing the latter at £3,468m. I would like to point out that this is the equity value KKR is paying for. The Enterprise Value (EV) for Northumbrian Water would be:
EV = Equity value + Total Borrowings
= £3,468m + £2,962m
= £6,430m
Based on its RCV of £4,196.4m, this deal effectively values Northumbrian at 6,430/4,196.4 = 1.53x RCV
which is within my ballpark valuation of a top grade water company in the UK

We need to wait till things get clearer and inflation get under control before funds will flow into stocks again. YTL earnings will remain resilient even under high inflation environment. Good time to accumulate more on weakness.

foreign funds pulling out while US Fed is aggressively raising interest rates, local institutions are keeping cash high, retailers stay at sidelines or get stuck with gloves, plantation, oil & gas, utilities, tech stocks, consumers, telcos, etc. Nothing is spared this round.

I think this downtrend may continue until at least early August, after the next US Fed meeting and inflation data for July is out

Well said @observatory.

Yeoh family has been lamenting about how badly the market has underpriced their companies' share price. Even they cannot change how the market and other investors view the value of their companies or assets. They just need to find the right time to unlock value, just like how they disposed off Electranet.

That's the reason why I proposed to YTLPower to list up part of its stakes in Wessex Waters in a way to quickly realise the value of Wessex, and at the same time to take back some handsome cash for special dividends or future expansions. They may or may not consider it as they know the value of Wessex will always go up in time. They just need to make sure the asset is well managed in terms of operational efficiencies as well as corporate finance wise.

I think that cash flows are more important than share price fluctuations, as long as the various operating assets perform to expectation, cash flows will come and share price will follow.
I am not concerned at all with the current depressed share price level, it just gives me more time and chances to accumulate more.

No update on the Jordan project yet

If the 5G business, data centre business and power export to Singapore project take off well, and PowerSeraya earnings post strong rebounds from FY2023, I am very confident YTLPower will be a 10 bagger in time.

If we don't look too far away, just take current RCV of 3,566m minus off debts 2,315m, current equity value of Wessex is worth 1.6x 3,566 - 2,315 = 3,390 million pounds or RM18.7 billion or RM2.27 per share

That is 3.3x the current market cap of YTL Power, and you get all the other assets like PowerSeraya, 5G business, data centres and net cash of RM2.2 billion for free!

If we take a more conservative approach in estimating the increase in RCV:
2022 3,566m
2027 3,566 +500m = 4,066m
2032 4,066 + 600m = 4,666m
2037 4,666 + 700m = 5,366m
2042 5,366 + 800m = 6,166m

Hence, RCV would increase to 6,166m pounds in 20 years and Wessex would be worth 1.6x 6,166 = 9,866 million pounds
Debts will increase to 2,315 + (6,166 - 3,566)*67% = 4,057 million pounds
Equity value will be 9,866m - 4,057m = 5,809 million pounds or RM32 billion or RM3.90 per share

Wessex Waters RCV has increased by 2.4x from 1,474 million pounds in 2002 when YTLPower acquired it to 3,566 million pounds as in 2022.
Just imagine if its RCV increases by 2.4x again in next 20 years, Wessex RCV will balloon to about 8,600 million pounds by 2042. If valued at 1.6x RCV as per valuation given to Electranet, Wessex would be worth 13,760 million pounds or RM77 billion then.

Assuming the increase of 5,044 million pounds of asset value is funded 67% by debts, total debts at Wessex would be 2,315m + 5,044m*67% = 5,694m pounds. Equity value would be 13,760m - 5,694m = 8,066 million pounds or RM45 billion or RM5.50 per share!!

@observatory, thanks for the news piece on LKS asset in the UK. This generally reinforces my view that regulated assets in the UK (and in other AAA/AA+ rated countries) are very much sought after for its long term appreciation potential and value protected by regulated tariffs.

As for LKS, I think YTLPower would not sell or list up Wessex Waters at low value, or for anything below 1.5x RCV. The longer it holds out, the regulated capital value base will just get larger along with inflation.
Wessex looks set to add easily another 500 million pounds to its regulated capital value by end of this 5-year regulatory period in 2025, when the new water tariffs for 2026-2030 shall be set based on the enlarged RCV and Wessex will enjoy much higher tariffs and revenue.

By extension, the estimated RM6.0 billion of debts sitting at PowerSeraya level may be covered by interest rate swaps too, I hope. Then the rising interest rate impact on YTLPower will be smaller.

Take an earlier example, when YTLPower secured the right to build the first private power station in Malaysia back in 1993 and tried to secure financing for the project, interest rates were going up to as high as 10%-12% in 1994-1997. When no local commercial bank then was willing to lend fixed rate loans, YTLPower approached EPF for a 10-year loan at fixed rate of 10% p.a. That move basically helped YTLPower fence off any interest rate movement risk from the project for 10 years. True enough interest rates went down to single digits after 2000, but the fixed rate loan has helped it to weather through uncertain periods.

Similarly, PowerSeraya always hedges almost 100% of its fuel cost requirements and also forex requirements for as far as 2 years. Hence its margin will not be affected directly by huge swings in fuel prices.

To add on the interest rate issue for Wessex, there are abundant supply of financial instruments like interest rate swaps that Wessex can buy to hedge against adverse interest rate movements.
Typically YTLPower management is very conservative and will not take any risk on commodity price movement nor FX nor interest rate movements. I expect Wessex Waters to have entered into some interest rate swaps in 2020 when the water tariffs were being set, so as to protect it from any adverse interest rate movements over 2021-2025.

In the case of YTL Power, I am expecting total dividend of 5.0 sen for FY2022 then possibly 7.0 sen for FY2023, giving a dividend yield of 7% for FY2022 rising to 10% for FY2023. These are way above returns provided by putting money in fixed deposits that pay only about 3.0% p.a. Though Bank Negara is expected to raise OPR by another 25bp + 25bp later this year, at most you will get 3.5% from FD and abour 4.0% from government bonds.

I think there is sufficient buffer in YTLPower's dividend yields that make it attractive relative to fixed income.

It is true that when interest rates increase, yield seeking investors may demand higher yield from dividend stocks. Everything is relative. For instance, current US Fed rates are at 1.75%. A common stock that gives a 4% dividend yield may still look attractive to investors. But as US Fed raises interest rates by another 75 bp in end July then another 50 bp in subsequent 2 meetings later this year, US Fed rates may touch 3.5% and hence risk-free bond yields may also go up to same level or slightly above. Then the common stock that offers 4% dividend yield will not look so attractive anymore compared to the returns in investing in risk-free bonds.

@observatory, the water tariffs for Wessex Waters are pre-determined by Ofwat for every 5 year period using its own assumptions on inflation (RPI), capex requirements, interest rates etc for the next 5 years, eg. Ofwat used 5-year forward assumption of RPI and interest rates for 2021-2025 when it made the determination in 2020.
While there is an update in RPI every year when Ofwat updates the assumption using the latest data, I am not too sure if Ofwat also adjust its interest rate assumption every year to get an out-turn adjustment for the next year tariff.
If not, there will always be a final adjustment at the end of each 5-year period to account for the difference in actual data vs Ofwat assumptions.

YTL vs YTL Power - which one to buy is up to your own judgement on which one may run up first. Each has own merits:
YTLPower has direct exposure to earnings surge from PowerSeraya, 5G business, potential power export to Singapore and new data centre business;

while YTL Corp has direct exposure to booming cement business, potential reviving of high speed rail project and potential monetisation of unlisted hotels and landbank

The recently acquired Tuaspring plant will increase the efficient power generation capacity of PowerSeraya by 20% and is estimated to contribute gross profit of SGD73m to SGD120m a year from FY2023 onwards as written in my earlier article below:

https://klse.i3investor.com/web/blog/detail/dragon328/2022-06-02-story...

I am hoping for the increased earnings from PowerSeraya and maiden earnings contribution from its 5G business to help offsetting the increased interest expenses.

For the balance RM15.0 billion of net debt at YTL Power and its other subsidiaries, a 25 basis point increase in average interest rates will result in RM37.5 million higher interest expenses for a year. Bank Negara has raised interest rates by 0.25% a couple of months ago and looks set to raise another 0.25% in early July. Economists project another 0.25%-0.50% hike in the remaining meetings in Sept or Dec 2022. So we need to brace for a total 0.75%-1.0% hike in interest rates in 2022, resulting in higher interest expenses of RM112m - RM150m for FY2023.

While its businesses are mostly recession proof and are not affected by high inflation environment, rising interest rates may be a dampening factor. YTL Power had about RM27.8bn net debt as of 31 Mar 2022, out of this an estimated RM12.8bn debts sit in Wessex Waters level.
The rising interest rates in the UK will increase interest expenses for Wessex Waters but I see this rising cost should be properly compensated by higher water tariffs.

Welcome. YTL Power share price is at depressed level now due to general weak market sentiments and foreign funds turning nett sellers of Bursa since early June 2022. But I think there are enough reasons to hold onto YTL Power shares to ride on its earnings rebound in coming months.

Furthermore, with inflation running high and food stalls & restaurants raising prices, consumers may cut down on eating / dining out, and cook more at home to save costs. AEON is offering essential grocery items in RM50 or RM100 packs with great discounts, to help consumers reducing costs.

ya food stuffs sold at pasar pagi or pasar malam are not cheap anymore, AEON supermarkets offer similar fresh quality food at similar prices or cheaper. One fresh whole chicken for just RM8.90 per bird, anyone?

PowerSeraya should not be benefiting from the electricity tariff hikes, nor suffering any disadvantage, as they typically hedge almost 100% of the fuel cost requirements. The electricity tariff hike is just to pass on the higher fuel costs.

The market wants to push AEON share price to year low to commemorate the last day of MD Samsuddin and first day of new MW Ono Keiji

YTLPower, being a defensive counter, offers dividend yields of over 7.0% p.a. Which stock else could offer higher?

After all, if not utilities and retails stocks, what else to buy and hold in this weak market?
Plantation stocks are having a roller coaster ride following big swings in CPO prices, tech stocks are crashing down (eg. MPI has dropped below RM30.00), glove stocks are seeing no sigh of bottoming, penny stocks attract less trading interests in the weak market.

I hope the earnings rebound from PowerSeraya and new earnings contribution from its 5G business will be able to cover the higher interest costs. All in, it is still good to hold on to ride on its earnings recovery phase and explosive earnings rebounds from PowerSeraya and 5G business.

Market sentiment is weak due to US markets crashing down and US Fed raising interest rates aggressively, causing fears of a recession. Fortunately the various businesses of YTL Power are recession proof.
The only setback is the rising interest costs due to increasing interest rates in the UK. Based on the debt amount of RM27.8bn as of 31 Mar 2022, a 25 basis point increase in interest rates will result in RM69.5m higher interest expenses for YTLPower.
We need to continue monitoring the impact of this in coming months.

Be patient and be positive.
I know many investors have got stuck in this counter and YTL Power for too long. I have a friend who lost half of the value invested in YTLPower at around RM1.50 few years back. If you have been holding them for months, just hold for another few more months then you will see the share price rebound will finally be coming.

1.67 coming soon!

WHile he was in charge of AEON in Thailand, he injected new concepts into retails/supermarket there and opened up hundreds of smaller-sized supermarket outlets for AEON in few years.

Hope the new CEO Ono Keiji will inject new breath into AEON Co (M) business and corporate structure. He has successfully expanded AEON shopping malls in Cambodia when he served as president of AEON Cambodia

good luck then!

right, next resistance is at 1.65-1.69