The Star, May 3, 2012
By Affin Investment Bank
YTL CORP BHD
Target price: RM2
WE are upgrading YTL Corp Bhd’s stock from an “add” to a “buy” recommendation with a higher target price of RM2 per share. Our revised target price reflects the elimination of a 15% holding company discount, which is consistent with our investment thesis; and value enhancement from YTL Cement’s acquisition.
We believe this stock is ripe to be re-rated as its major shareholder mulls the potential elimination of holding company discount. We estimate YTL’s holding company discount ranged from 10.5% to 27.4% in the past one-and-a-half years.
It appears that the privatisation, vide share swap of YTL Power, YTL Land and YTL E-Solutions, is very much on the cards. Hypothetically, if YTL can successfully collapse the minority “leakages” of its listed subsidiaries, the enlarged YTL may morph into a significant concession-based entity with room to pay out generous dividends.
YTL will have access to more than RM700mil free cash flow, in the absence of cash flow leakages to minority interests. This suggests that there is an upside to dividend per share (DPS).
We opine the “technical” re-rating of YTL after the acquisition of YTL Cement may cause YTL’s major shareholder to also collapse the minority interests in its other listed assets. Since the privatisation was announced, YTL was re-rated from 12 times to 13 times financial year ending June 30, 2013 (FY13) earnings per share (EPS).
Although, the conglomerate has outperformed the KLCI by 6.9% year-to-date, we believe there is scope for further share price discovery as major shareholder potentially extrapolates the success of YTL Cement on its other listed assets.
We also believe that minority interests may accede to this rationalisation exercise as a back-test suggests that YTL Cement’s minorities were handsomely rewarded with a 16.6% upside since the exercise was proposed in December 2011.
We acknowledge the privatisation of YTL Cement was a win-win proposition for both YTL and YTL Cement. YTL benefited from a 6% earnings lift; increased in free float and trading liquidity; and increased in YTL’s ability to pay higher dividends. Currently, YTL only pays a 2 sen net DPS annually on a dividend ratio of 17.4%.
YTL Cement was delisted as YTL acquired more than 90% of its outstanding shares. We took the opportunity to include the privatisation into YTL’s FY13-FY14 earnings forecast. The acquisition of YTL Cement was value enhancing for YTL given the lower price earnings ratio (PER) acquisition price tag in comparison withYTL. Thus, we now lift YTL’s FY13-14 EPS by 6.1% and 6.7%, respectively.
We project a three-year earnings compounded annual growth rate (FY11-FY14) of 7.6% backed by stable operating parameter for utilities, management services and real estate investment trusts; and a pick-up in cement demand with the roll-out of major construction projects from LRT extension, property development and phased construction of MRT.