Asia Pacific Equity Research, 19 March 2008
Price Target: RM 10.35
Capital management program better appreciated in uncertain times
? In our feature of Malaysian dividend yield plays on 6th March 2008, YTL Corp was not included as a potentially strong sustainable yield story because the qualification was limited to actual cash payouts. Most of YTL’s capital management return is grounded in its share buy back program and subsequent dividend of treasury shares. Combined with the Restricted Offer for Sale (ROS) of shares in YTL Power and YTL Cement, a virtuous cycle emerges as these shares received will then earn their own cash dividends and dividend of treasury shares. As a result the consolidated capital management return of YTL Corp increases every year from an estimated 6.7% in FY08E to 8.2% by FY12.
? YTL has adopted this sophisticated capital management strategy because
i) the consolidated group is supported by strong long-term concession based cashflows that give an excess of M$570MM a year in cash dividends to the holding company level
ii) the listed subsidiaries are fundamentally strong and undervalued, in our view, and they can sustain their own dividend payouts and share buy back program and
iii) capital gains from the ROS and dividend of treasury shares is tax free.
? YTL Corp shares have started to outperform the market in this uncertain period due to the defensive qualities of this capital management program, in our view. Nonetheless these defensive qualities are backed with potentially strong upside share price catalysts in the future from the fast train to Singapore (and its significance to the development of the Southern Corridor) to M&A in YTL Power. Our M$10.35 Dec-08 PT is based on a 10% discount to YTL's SOP valuation. Risk to our PT is the deterioration of mark-to-market valuations of its listed subsidiaries.