YTL Corporation Berhad, a Vision of the Future

Technology Business Review Magazine, Volume 1, September 2004

YTL Corporation Berhad, as befits one of Malaysia's largest and most powerful companies, is constantly in the news. Tan Sri Francis Yeoh Sock Ping, YTL's Managing Director and one of the most respected and powerful businessmen in the country today, is as closely scrutinised as an entertainment celebrity for any clues as to his next move. In light of Yeoh's recent statements regarding his aim to make YTL a global power by 2020, a lot more people are taking a closer look at the company.

A Brief Introduction to a Success Story
YTL's history began in the construction industry. Tan Sri Dato' Seri Dr. Yeoh Tiong Lay started his construction company in 1955 and built it up into a very respectable mid-size contracting firm. Real fortune, however, came in the third generation of the Yeoh family, when Francis Yeoh took the company into the utility industry. As the first independent power producer (IPP) to be established in a Malaysia, Yeoh was able to cut a lucrative deal with Tenaga Nasional that has since set the tone and style for the company.

Under the requirements of its power purchase s agreement, the company is protected from demand risk by virtue of the minimum take-or-pay quantity of 7,450 gigawatts of electricity (or 72% of the plant's output) that has to be purchased by Tenaga Nasional Berhad, assuring the IPP of a very respectable income of around RM1.1 billion per annum. Later diversification into a number of lines including cement manufacturing, hotels, technology and property development resulted in the creation of YTL Corporation, with a stable of companies listed on both the Bursa Malaysia and the Tokyo stock exchange, with a combined market capitalisation of RM16 billion.

YTL is one of Malaysia's biggest and most respected companies. Overlooking the awe most people in Malaysia show for YTL's outstanding financial success, a lot of genuine respect was garnered by the way the company emerged relatively unscathed from the turmoil of the 1998 downturn. Francis Yeoh successfully led the company through the recession, with its assets not only intact, but swelled from buyouts of hotels, land, companies and other assets that were selling dirt-cheap at the time.

Already highly (or at least warily) regarded in Malaysia, the skilful captaining of the company through that rough period also established Yeoh's international reputation as one of the most astute and pre-eminent businessmen in the country, delineating him sharply from the crowd of 'rich local company heirs' who have been knocking around.

YTL's core businesses includes energy production

Aiming to be a Global Power, Yeoh has made no secret of his ambitions for YTL to become a global power by the year 2020, specifying the company would grow at a 20% annual compounded rate until the target year (resulting in a market capitalisation of RM300 billion) and stating he was confident the company could achieve this impressive goal. In a recent interview on CNN's Talk Asia, he said 'Do I have a doubt that the company will be huge, like GE (General Electrics) or Siemens? Absolutely none.'

Just how realistic is it? According to Yeoh, YTL has been growing at an annual compounded rate of 42% since 1986, but the growth is expected to slow to a compounded annual rate of over 20% until 2020, which will result in an earnings growth of over RM300mil a year.

Their growth strategy is centred on acquiring regulated businesses under long-term concessions, which would yield highly predictable revenue streams and profits. So, going by his own estimates, the vision is well within the company's capabilities. In pursuit of this strategy, YTL has been aggressively seeking investment opportunities abroad.

YTL first grabbed international attention when its subsidiary, YTL Power International Bhd made a successful bid on the English utility company Wessex Water, which was put on sale by Enron during the asset selling-off spree that followed the company's collapse. The buy gave YTL access to 1.2 million water and 2.5 million sewerage customers, mainly in the south west of England.

YTL is one of Malaysia’s biggest and most respected companies

YTL's move came as a shock for all the bidders involved, as the hot favourite was a consortium of UK banks led by Royal Bank of Scotland and Abbey National. YTL Power paid £1.2 billion for the plant, less than the £1.4 billion that Enron originally paid for it. The high-profile Wessex buy was especially attention-grabbing as an Enron official was arrested on suspicion of having received a bribe connected with the deal. The British police subsequently concluded there had been no misdemeanour, praised the company for its helpful and transparent assistance during the investigation and YTL made its first major move into the international energy industry.

The Wessex buy wasn't the first overseas purchase YTL had made. In 2000, YTL Power Investments bought 33% of ElectraNet SA, the monopoly owner and operator of South Australia's electric transmission network on a 200- year lease, at a cost of A$58.5 million. The latest acquisition to stir up the market was the June announcement of a 35% stake and loan stocks in Indonesia's PT Jawa Power, the second largest independent power generator in the populous archipelago. PT Jawa Power operates a 1, 220 megawatt (mw) coal-fired power plant, and YTL's acquisition of the Indonesian stock has led to analysts upgrading their calls on YTL stock to 'buy'.

Part of the proposal involves YTL acquiring 100% equity in PT Powergen Jawa Timur, the operator of the 1,220-mw coal- fired power station, for US$3.6 million. There has been some fretting by analysts regarding the Indonesian deal, the major area of concern being Indonesia, with its less regulated operating environment compared with Australia or the United Kingdom, would also prove riskier. Yeoh, however, doesn't share these concerns, or at least not to the same extent. "The risk is always there in any developing country. At a certain time in history, you ride with whatever risk you invest in. And we think Indonesia's time has arrived," he said.

The Necessity of Expansion
The expansion of the company into other regions is hardly surprising, considering how crowded the local power generation scene has become. There are five independent power producers (IPPs) currently supplying Tenaga Nasional, with two more in Sabah due to begin operations in 2005, once the country's largest-ever generator, the 2,400MW Bakun dam, now under construction in neighbouring Sarawak, is complete. Back in 2001, some analysts were speculating the only growth Malaysian power firms would be able to achieve would come from mergers and acquisitions.

There appears to be little desire for mergers, however, with most of the operators, like YTL, looking to diversify and expand their operations. Most of the companies have been concentrating on regional expansion, and YTL is simply the most visibly successful at reaching beyond the region to more mature markets.

The expansion moves have, in general, been applauded by the market, and most analysts. MAYBAN Securities, for example has upgraded YTL Power International Bhd shares to a "buy" after the Indonesian deal, stating that “the acquisition will enable YTL Power to develop and expand its presence in utility businesses world-wide, particularly in the rapidly developing Asean market. YTL Power will have an income-generating asset and access to the region. Based on Jawa Power's FY02 pre-tax profit of US$153.5mil, the acquisition would add 20.9% to YTL Power's FY05 earnings per share to 37.1 sen."

According to Ratings Agency Malaysia (RAM), "...YTL Corp's financial strength stems largely from its utilities businesses, which currently contribute over 75% of the group's turnover and net profit.”  Despite some concern expressed over the risk uncertainties pertaining to the PT Jawa deal, and the higher consolidated debt level the company acquired as a result of the Wessex Water deal (from RM11.24 billion to RM13.15 billion as at end of financial year 2003), RAM has been generally positive in its analysis of the company's financial standing and indicated that they believe ‘the Group's future earnings and cash-generating ability remain solid’.

RAM has reaffirmed the AA1 rating of YTL Power International Berhad's RM 750 million Redeemable Unsecured Bonds with a stable outlook. Despite some concern that YTL was overreaching itself, when it first began scouting for overseas utility companies to buy into, the expansion program has proven successful, if the latest company's latest financial results are any indication.

YTL's net profit for the nine-month period ending March 31 was RM592 million, up from RM367 million in the previous corresponding period, and increase of 61.3%. The increase is attributed to better performance of its subsidiaries, among them YTL Power International Bhd, whose revenue rose 9.2% to RM2.51 billion from RM2.30 billion, with 63% of its revenue and 50% of its profit before taxation, derived from its assets in Australia and the UK. In the past, company revenue broke down to 85% from the local energy production business, with the remaining percentage taken up by the other businesses and investment holdings.

Yeoh has stated that for the time being, YTL will not be actively looking for further expansion opportunities in Indonesia, as it will be concentrating on the PT Jawa plant. However, that doesn't mean they won't look around a little later on. In order to attain his own Vision 2020, Yeoh has indicated the company will be looking at utilities in Europe, Asia and Australia. 'Right now, I would say it's the wrong time to bid for utilities,' Yeoh said in April, 'within a calendar year from now, there will be a huge restructuring in the world economy. Interest rates are going to go up.' And when the rates go up, Yeoh expects financially-troubled companies to part with their assets a little more cheaply.

On their own part, YTL is confident increased interest rates will not affect them, as they have RM6 billion in cash reserves to tide them through the hard times. According to Yeoh, the YTL group stands to gain RM120mil on the bottom line for every two percentage points rise in interest rates, just from the reserves. Of course, such optimism is always prey to the unexpected forces of the international marketplace, but then, given YTL's track record in achievements, there appears to be every likelihood of the company achieving its own Vision 2020.

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