CLSA Asia Pacific Markets, 24 February 2005
Target Price: RM6.20
Current Price: RM5.20BUY
YTL Corp is currently in a sweet spot with all core divisions well positioned to deliver growth. Underpinned by acquisitions and organic growth, we forecast 04-06 cagr of 20%. With 06 PER at 11.1x and upside from imminent property asset unlocking, we see a 19% share price appreciation from current level. Our new target price of RM6.20 values the stock at RNAV or implied 06 PER of 13.0x. Upgraded from O-PF to BUY.
New growth phase
YTL Corp is firing on all cylinders. Core divisions like utility, cement and property are projected to deliver earnings growth of 15-41% over the next three years, underpinned by both organic and acquisitions. Following the recent earnings upgrade at YTL Power (by 6-10%), we have also revised up YTL Corp earnings to factor in contributions from Perak Hanjoong and the latest property launches. The net impact is an earnings upgrade of 19-27% over FY05-07.
Ripe for unlocking
Three of YTL’s investment properties – two shopping malls and a hotel building – are to be injected into a REIT. This exercise will allow YTL to unlock value of its investment properties which has a combined book value of about RM400m. Based on gross yield of 6% and estimated annual rental Ebit of RM50m, YTL could raise RM408m from this exercise if it were to retain a 51% stake.
YTL Power, Tanjong, AIG, and Mitsubishi/CLP, have been short-listed for the acquisitions of 100% stake in Intergen. The Intergen portfolio consists of 7844MW of generating assets via 10 international plants and is reported to be worth US$4.8bn including US$3.3bn of debt. If successful, YTL Power will likely gear up rather than tapping the equity market to finance its equity portion.
Cheap big cap stock
YTL Corp is one of the cheaper big cap stock in the market, trading at 11.1x 06 earnings against 2-year EPS cagr of 20%. If we were to strip out YTL Power, the rest of the operations are trading at 9.2x. With reputable management, decent growth, support from share buy back programme, and imminent unlocking of asset values, we see good upside potential. Target price raised to RM6.20 on RNAV or implied 06 PER of 13.0x.
Combination of acquisitions (in the likes of Jawa Power and Perak Hanjoong) and organic growth (aggressive property launches and Wessex water rate hike) are driving YTL Corp into the next growth phase. Based on our latest forecast (after a 19-27% upgrade), YTL is set to record a 2-year core EPS cagr of 20.0%, underpinned mainly by stronger performances at power/water, cement and property divisions.
• YTL Power is projected to grow by 20% over the next two years. This is to be driven by (i) Jawa power plant acquisition; (ii) Jawa O&M operation; (iii) Wessex water rate hike starting April 2005; and (iv) interest savings of RM42m a year from the buy back and conversion of USD$150m bond.
YTL Power is still the biggest contributor, accounting for 65% of YTL Corp’s net profit. Every 10% change in RM/USD rate varies YTL Corp’s 06 net profit by 2.2%.
• YTL Cement 2-year earnings cagr of 28%. The cement operations is going through an aggressive capacity expansion following the acquisition of the remaining 50% stake in Pahang Cement in March 2004 and more recently a 64.84% stake in Perak Hanjoong. With Perak Hanjoong, YTL Cement has more than tripled its clinker capacity to 4.2m metric tonnes, making it the second largest integrated cement producer in the country with a 24% market share.
Perak Hanjoong had been loss making in most of the years due to its high operating and financing costs. We expect an operational turnaround under the management of YTL which has superior production efficiencies and better cost control. For a start, YTL has restructured Perak Hanjoong’s existing debt with 200 basis point or RM20m interest cost savings per annum.
• Property to deliver 50% 2-year earnings cagr. Coming from a low base, the property division is expected to see strong earnings momentum thanks to the healthy Klang Valley property market and more aggressive launches. Other than a successful launch at its Puchong project, the next big launch will be Lake Field, a JV project with EPF. EPF will have 20% share of the units developed as compensation for providing the land. This development will have a total GDV of RM925m, to be developed over the next three years (FY05-07). Assuming a gross development margin of 20%, this project could generate gross profit of RM185m over the next five years. YTL Land currently has roughly RM200m of unbilled sales and target to launch RM425m worth of properties in 2005.
YTL Corp is valued at RM6.21 (our target price of YTL Power which is based on 5% premium to DCF) or RM5.57 (YTL Power at market) per Fd share based on the sum-of-parts methodology. If we were to strip out YTL Power’s market cap, YTL Corp’s non-utility operations are trading at 06 PER of 9.2x against 3-year earnings cagr of 22.4%.
Chia Aun Ling
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