Asia Pacific Equity Research, 5 April 2007
Price Target: M$9.20
A rich reawakening
We initiate with Overweight: YTL offers a robust earnings cycle story where visibility is arguably more secure than its peers, which are trading at multiples of 20-26x earnings. 70% of the group's net profit is derived from an annuity-like earnings stream in YTL Power while the cyclical businesses of cement, property, and construction simultaneously add an earnings uptick on the back of increased investment spending in Malaysia.
We have not incorporated the M$11 billion bullet train to Singapore, or the M&A potential of YTL Power, in our estimates. The risk-reward valuation scenario, therefore, looks compelling to us. With capital management and sustained ROE improvement, we believe a re-rating of the stock is possible in 2007.
Land bank overlooked, concessions underpin PT: YTL owns land worth M$1.2 billion, mostly accumulated in the 1980s, which includes the recent projects at Sentosa Island. Concessions and land bank assets account for 73% of YTL's SOP value while similar assets in Gamuda and IJM constitute only 25-30%. Comfort and sustainability of YTL's SOP valuation and earnings are arguably better than its peers, in our view.
Valuation, price target, risks: We peg our Dec-07 PT of M$9.20 at a 20% discount to YTL's SOP. This holding company discount is conservative and could narrow considerably following similar experiences of other infrastructure conglomerates such as Gamuda and IJM, which now trade at 10-15% discounts to their RNAV. Key risks to our PT are 1) a cut-back in government spending, and 2) a significant slowdown in the local property market.
To listen to highlights of the initiation report, please visit: https://admin.acrobat.com/_a348761/ytlc90seconds/
Text from the audio report:
Hi, this is Lucius Chong from JPMorgan Malaysia and I would just like to take a couple of minutes to highlight my recent initiation report on YTL Corporation. We have an Overweight recommendation on YTL, with a Price Target of M$9.20 – offering 30% upside from current levels. Our valuation is based on a 20% discount to YTL's sum of parts which is more conservative than the 0% discount we apply for the likes of Gamuda and IJM.
YTL is Malaysia's largest infrastructure conglomerate by market cap. Its portfolio of assets range from utilities, construction, cement, property, fast rail transportation and now telecommunications after securing a WiMax licence. The business model is based on building a strong base of long-term concessions while having the right exposure to cyclical earnings for the leverage in growth. Interestingly despite being the biggest player, YTL's valuations are among the lowest compared to its peers.
We believe YTL is at the start of another earnings cycle following a period of consolidation and M&A. During this period the utilities business went global and the cement and property business acquired distressed local assets to make them market leaders in Malaysia. Working off a larger and more robust asset base, the quality and sustainability of this next earnings cycle could be better than the 1990's. We currently forecast a 3-year EPS CAGR of 19%.
Adding to the strong existing fundamentals, are potentially large catalysts not factored in. There is the proposed bullet train to Singapore, greenfield IPP projects in Indonesia, IPP consolidation at home, and rolling out the recently secured WiMax license in its subsidiary YTL E-solutions.
So we believe the risk-reward scenario for YTL looks compelling. It is one of our large cap top picks in Malaysia right now. Do click on the link, for a soft copy of my report. Thank you. This is Lucius Chong from JP Morgan Malaysia.