CLSA (CIO Notes), 1 April 2005
Current Price: RM5.75
Target Price: RM6.60
YTL's big war chest and astute management team have steered the group into a growth phase. Even without further acquisitions, YTL will be able to sustain its current annual growth momentum of 20% since 2002. Sitting on gross cash of RM6bn, upside risk from potential acquisition is good given growing investment opportunities in the region. Despite recent strong outperformance, YTL is still undervalued. Our target price of RM6.60 values the stock at fully-diluted RNAV and 14x 06 earnings.
Acquisition & organic
YTL is in a sweet spot. Its big war chest, with gross cash of RM6bn, will help deliver 20% long-term Cagr. A series of acquisitions since 2002, and a robust domestic consumption story, means two-year (FY04-06) earnings Cagr is projected at a strong 22%. Growth will be driven by the acquisition of Jawa Power and Perak Hanjoong Cement, an increase in the water rate at Wessex Water, and aggressive property launches.
Property potential unfolding
YTLís property division has in the past been overlooked by investors, partly because of its small contribution to group earnings (<5%). This is about to change. With the right land bank, and products to cater to the healthy demand for landed residential units and commercial office space, the property division is set to become a major growth driver, accounting for 16% and 25% of YTLís growth in FY06 and FY07. The divestment this year of three buildings into a real estate investment trust (Reit) will further unlock value and accelerate the development of its commercial landbank.
Leveraging on its global platform, YTL has been actively seeking assets globally. Previously confined to only developed markets, the recent acquisition of Jawa Power Indonesia marks a shift into riskier, but higher growth, markets. This opens up more investment opportunities. Upside from more value enhancing and earnings accretive acquisitions is in the pipeline.
YTL Corp is worth RM6.60 per share on a break-up valuation basis. This is 20% more than on a sum-of-parts valuation of its listed entities. With good management, strong earnings growth and a global presence, YTLís 06 PE of 12.3x is undemanding compared with local large cap and regional peers. Our target price of RM6.60 values YTL Corp at RNAV or an implied 06 PE of 14.0x.
Chia Aun Ling