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GK Goh: Upgrade YTL Corp to BUY

GK Goh Research, 3 May 2005

YTL Corporation
Cranking up the excitement

Investment summary

YTL Corp is one of the few construction groups that can buck the sectorís downtrend, thanks to an earnings base that is diversified business-wise as well as by geography. We are upgrading the stock to Trading BUY for the following reasons:

  • YTL Corp has made early inroads into Indonesia and is planning massive investments.
  • A real estate investment trust (REIT) listing will unlock the hidden value of assets and release cash.
  • We are raising our profit forecasts as the earnings outlook appears stronger than our earlier numbers.

Indonesia

It is estimated that Indonesia will spend US$22bn on infrastructure in 2005 alone and a hefty US$72bn over the next five years. Although Malaysian contractors and infrastructure groups are scrambling to take advantage of such opportunities, YTL Corp is so far the only one that has made inroads. Through YTL Power, the group acquired 35% of the 1,220MW PT Jawa Power for US$139.4m. PT Jawa is a coal-fired power plant and one of the largest IPPs in Indonesia.

YTL Corp intends to venture into toll concessions, express rail projects, cement plants and other power plants in Indonesia. It is optimistic that the elements are in place for companies to reap good returns and profits. Other construction and infrastructure companies, however, are more cautious and are concerned about the depth of the financial markets and the sanctity of contracts in Indonesia. YTL Corpís edge on this front is its cash hoard of close to RM6bn.

REIT listing

YTL Corp plans to undertake a REIT listing sometime this year. Phase 1 will pull together three assets on Jalan Bukit Bintang, i.e. JW Marriott Hotel, Star Hill Centre and Lot 10 Shopping Centre, valued at around RM1.2bn. The listing will reduce YTL Corpís stake in the assets from 100% to 51%, in return for close to RM600m in proceeds.

The REITs should be well received as the assets are in prime locations and dividend yield is expected to be over 6%. Phase 2 will involve the injection of more assets including Ritz Carlton Hotel and Apartments as well as two parcels of land for development in Kuala Lumpur worth a combined RM2bn. YTL Corp will also consider a restricted offer for sale to shareholders in the second phase.

Earnings revision

YTL Corpís interim net profit of nearly RM300m made up just over 50% of our original full-year forecast. 2H results are likely to be stronger given that YTL Cementís acquisition of Perak Hanjoong was completed towards end-04 and YTL Power accounted for only one month of Jawa Powerís earnings in 2QFY05. As a result, we are upgrading our FY05-07 net profit forecasts by 9-11%.

Valuation and recommendation

Although YTL Corp failed in its recent bid for InterGen assets worth nearly US$5bn, the group is still actively looking assets in both mature and developing economies. The Indonesian market is promising and the groupís success in clinching projects in the country will be viewed positively given its fine track record in M&As.

The share price has retraced 9% from its recent highs. We are upgrading the stock from hold to Trading BUY. Although valuations are not particularly cheap at 13x diluted CY05 P/E, which is in line with the broader market, its shares are supported by the ongoing share buyback exercise and a diluted RNAV/share of RM5.70.

Investors with a higher appetite for risks have two choices. We prefer warrant B for its longer period to maturity, higher gearing of 5x and significantly better liquidity. The warrants are also trading at a 26% discount to their Black-Scholes fair value of RM1.45.

Terence Wong

wong.terence@gkgoh.com

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Click the following link(s) for details:
YTL Corp 20050503 GK Goh2.pdf

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