Asia Pacific Equity Research, February 9, 2008
Price Target: M$10.35
Powerful catalysts in a capable pair of hands
? We make a timely revisit to our YTL investment argument. With 68% of its SOP and 72% of earnings underpinned by utility, O&M recurring businesses and cash, we believe that YTL is a relatively safe, defensive candidate in the backdrop of current macro uncertainties. Nevertheless, if the external environment remains conducive to growth, YTL’s earnings cycle is primed to accelerate due to the operating leverage of cement, property development, hotels and construction – where all have little debt but have expanded capacity and market share over the last few years.
? YTL’s current 30% discount to its SOP is undeservedly high, in our view. With such defensive characteristics yet strong positioning for a cyclical upturn, we think the discount should be closer to 10%, the basis of our Dec-08 M$10.35 PT. YTL traded at par or even a premium to its SOP before 2002. This coincided with the last earnings cycle as well as a re-rating of its non-listed businesses. We believe it is facing the same scenario again, in addition to new events like the sweetener of the ROS program, where the value of its listed subsidiaries is crystallized directly for the benefit of YTL shareholders. A key risk to our PT is capital raising in its subsidiaries.
? The biggest potential catalyst for YTL’s re-rating remains the M$11B proposed fast train between KL and Singapore. Recent comments by senior Singapore ministers suggest that the politics is actually a lot more supportive of the project than the market believes. It is enough for us to work on an initial NPV estimate where, based on guidance to key operating assumptions and using examples of fast train projects around the world, the project could add M$2.5B or M$1.56 per share in value.