Also, given the latest Sime Darby bid for Hyundai-Berjaya as well as the ongoing M&A deals among banks and plantation companies, YTL Corp will receive investors' attention once again given its huge war chest and impeccable acquisition track record.
Given similar PEs, we prefer YTL Corp over YTL Power today because YTL Corp offers:
a) better stock liquidity, with 1.35mn shares turnover daily vs. YTL Power's 0.63mn; b) higher beta of 1.13 vs. YTL Power's 0.52 (strategic given consensus bullish market outlook);
c) broader exposure to the buoyant domestic economy (properties, cement, retail and tourism).
d) direct exposure to benefits of potential new contracts secured by the Group as the construction division is wholly owned by YTL Corp.
Current valuation of YTL Corp at a FY2004 PE of 12.0x is inexpensive compared to the market average of 15x and its historical average of 19.6x. Furthermore, this valuation assumes no new projects or asset acquisition and is at the lower end of its historical PE band.
Based on current rating of 12x FY04 net EPS and assuming no utility asset acquisition, we expect YTL to trade up to RM5.26, a gain of 13.4% from the current price of RM4.64. A new utility acquisition yielding 10% and priced at 12x PE will raise its valuation to RM6.50 - without use of appropriate gearing to enhance overall equity return and taking into account any role in water supply projects in Malaysia.
RISK & MITIGATING FACTORS
Main income contribution is from YTL Power, which may not be successful in acquiring more utility assets. Increasingly number of regulated assets for sale in Europe and Asia is however positive for a cash rich company like YTL Power
Earnings from YTL Power are subject to regulatory and geopolitical risks. This is mitigated substantially because YTL Power's investments are located in politically stable and developed nations.
Overseas profits of the Group are subject to volatility in exchange rates, which is currently to the Group's advantage. Forex exposure of the Group is mitigated by matching foreign debts with revenue streams.
Property projects are subject to implementation risk as well as cyclical risk of the property industry.
YTL Corp is one of the largest diversified groups listed on the Malaysian Stock Exchange. With a market capitalisation of RM6.8bn, its core business division are as follows:-
Four of these divisions are held through listed YTL Power International, YTL Cement, YTL Land & Development and YTL e-Solutions - which together has a combined market capitalisation of over RM8bn.
Utilities (through 60.6%-owned YTL Power): YTL Power owns and manages regulated utilities assets in Malaysia, the UK and Australia with long term concessions:-
as an Independent Power Producer (IPP) with two gas fired combined cycle power plants in Paka and Pasir Gudang with a combined capacity of 1212MW. The concession period is 21 years, expiring on Sept 2015.
100% of Wessex Water, one of the most efficient water and sewerage operators in the UK, serving the south west of England covering an area of 10,000 sq km. The concession is in perpetuity and can only be terminated by the giving of at least 10 years notice
33.5%-owned ElectraNet owns and operates the power transmission grid for the State of South Australia under a 200-year concession.
YTL Corp provides O&M services to YTL Power, for which a management fee is paid.
Cement Manufacturing (through 67.So/o-owned YTL Cement): YTL Cement operates the only cement plant in the East Coast of Peninsular Malaysia. The installed capacity of its state-of-the-art plant is 1.2mn tonnes p.a. YTL Cement also owns two slag cement plants with a capacity of 0.5mn tonnes each in Westport and Pasir Gudang. It is also the largest mixed concrete company in the country with over 70 batching plants and 700 mixers as well as owns stones quarries throughout the Peninsular.
Construction Contracting (through 100%-owned Syarikat Pembinaan Yeoh Tiong Lay): Pembinaan YTL has a strong reputation for constructing buildings (hospitals, office buildings, hotels, schools, etc) and large scale infrastructure projects (power plants, cement plant and rail link) on time and on budget. YTL Power's gas fired power plants were constructed in a record 22 months. This construction arm is aggressively building up its orderbook, which is now over RM1 bn.
Property Development (through 64.4%-owned YTL Land & Development): YTL Land has a landbank of over 2,000 acres with an estimated sales value of RM12bn and no holding costs. Currently, its largest project is the 294 acre Sentul residential and commercial development in Kuala Lumpur. This project is expected to generate a total sales value of RM8bn over the next 7 years. The prime Lot 10 and Starhill shopping complexes are held by YTL Corp.
High Speed Rail (through 50%-owned Express Rail Link): ERL owns and operates the high speed rail link between the center of Kuala Lumpur and the Kuala Lumpur International Airport in Sepang. This service currently transports 3mn to 5mn passengers p.a.
Hotels & Resorts: YTL Corp is also the owner and operator of the following 5-star hotels and resorts:-
JW Marriott Hotel, Kuala Lumpur
YTL Corp also owns stakes in the Eastern & Oriental Express train service and the Vistana chain of hotels in Malaysia.
Technology Incubation (through 74.1%-owned Mesdaq-listed YTL e-Solutions): YTL e-Solutions owns, amongst others, stakes in a leading VOIP company, a real estate portal and a multimedia messaging service provider.
Segmentals: The main contributor to group profits is YTL Power through its power generation and water businesses, which together with the O&M fees paid to YTL Corp constitute over 85% of group profits. This is followed by the cement manufacturing and property development divisions, which contributed 5.0% and 4.6% of group profits.
Profitability: YTL Corp has been consistently profitable, recording a compounded annual growth rate in pretax profit of 55% over the last 15 years. The latest 1 HFY2004 results showed a high return on equity of 13.2%. Core earnings per share is expected to increase to 38.8 sen in FY04, giving a PE ratio of 12.0x at current price.
Gearing: Gearing is expectedly high at 2.6X due to the large portfolio of utility assets held by the group, but these comprise mainly of non-recourse project financing. Interest cover is very comfortable at 2.9x.
Cash Reserves: As at 31 December 2003, group cash reserves amounted to RM6.2bn, with RM5bn held at the YTL Power level, RM129mn at YTL Cement and the rest at the holding company.
Dividend: Over the years, dividend payment is consistent and increasing as group profitability rises. Net dividend yield is however 1.16% compared to 4.2% for YTL Power.
Share Repurchase: As at 31 December 2003, a total of 27.22mn shares were repurchased and held as Treasury shares at cost of RM137.96mn, implying an average cost per share of RM5.07. In Jan 2002, 28,425,050 shares valued at RM136.59mn were distribute as share dividend to shareholders on the basis of 1 for 50.
Forecasts: The power generation and water businesses have been consistently contributing over 75% of group profits. However, contributions from the other divisions are expected to grow strongly in the next 24 months. An orderbook of over RM1 bn is expected to boost contributions from the wholly-owned construction division in FY05 and FY06. The property division will see higher profits from buoyant property demand as well as higher yields from its investment properties. Sale of Portland and slag cement will continue to be boosted by higher property and public construction activities. Assuming no utility asset acquisitions, we expect these three divisions to raise group net EPS to 43.8 sen in FY05 and to lower prospective PER to 10.6x.