YTL Corp: Premium for governance, paying for growth potentialCompany Focus (Mayban Securities), 14 August 2001
YTL Corporation Bhd
12-month target price: RM4.50
We like: (1) YTL Power’s ability to invest, (2) its partnership with CLP in venturing into Asian markets, (3) construction business led by a massive RM800m order for Express Rail Link (ERL) and (4) the revival of the Sentul Project. The YTL Group has been able to adapt with time, evolving from pure construction play, to power and even e-commerce – a testament to management acumen and deal-clinching ability. BUY.
Power generation remains the most convincing potential growth segment. With RM3.3b in cash, and a recently-clinched 49% joint venture in a 1,400MW plant, the options for YTL Corp. are not particularly limited, Hong Kong-based shareholder CLP Power International can potentially offer reciprocal investment avenues into Asian power.
Spinning capacity utilised wisely, and at a fantastic rate, in our opinion. YTL Power International secured RM152.6m revenue for 3 years at 45% gross margins. We are also pleased that (1) spinning capacity is now nearly fully utilised, and more importantly (2) a rate of 10.9 sen/kWh was secured with the current backdrop of plummeting PPA rates.
Jimah increases YTL Power’s generation capacity by 686MW by 2003. We note that although YTL Power has a 49% stake in the plant, it has managed to secure a 70% share in the lucrative O&M contract. With CLP’s proven expertise in coal-fired plants, we like Jimah.
ERL construction and Sentul Raya Project keeping order books filled. The massive RM2.4b ERL project is expected to keep Syarikat Pembinaan Yeoh Tiong Lay Sdn Bhd busy until April 2003. Meanwhile Sentul is in the pipelines.
Outlook positive. Over the last 5 years, management has, averaged returns of 12.4% to shareholders, 8.6% to capital, and kept pre-tax margins above 30%, PE of 15.6X, P/B of 1.4X and historical 20% premium to RNAV. In our opinion, valuations are justified by management stewardship and expansion potential.
1. Generates incremental income of RM152.6m for the next 3 years despite being 33% into 21-year PPA term via SPPA with Tenaga. Gross margins – circa 45%. The plants technically do not need to meet availability and dependability requirements – the original PPA stipulates a Minimum Quantity of electricity of 7,450MW p.a. rather than separate Capacity and Energy payments. Plants are currently at above 90% availability, and YTL Power is selling spinning capacity (above the minimum equivalent of 70%) for incremental revenue.
2. Has RM3.3 billion in cash equals 1,400MWs instantly – the key to capacity growth. Assuming a debt-equity funding ratio of 70:30, YTL Power, together with CLPPI can potentially build up to 10,000MW of generation capacity in Malaysia.
3. Partners CLP – an ambassador to Asia? CLP has RM27b in assets, RM1b in cash, owns 17,600MW generation assets in Hong Kong and China, supplies 75% of Hong Kong’s electricity. YTL’s expansions in power will be focussed on developed Australasian markets, in our opinion. Despite the 60:40 JDA to invest in power in Malaysia, we believe CLP Power International, 5% shareholder, may still be a partner to YTL Power’s regional plan.
4. Brews new deals in Negeri Sembilan and Singapore. While Jimah is awaiting PPA pricing, YTL Power with CLPPI has jointly bidded for stakes in PowerSenoko, PowerSeraya and Tuas Power. YTL Power is to potentially spend RM570m, from its strongly subscribed US$150m Exchangeable Guaranteed Bond issue, offered at 200bps spread above US Treasuries.
Construction – ERL for the next couple of years. Sentul Raya Project redesigned.
1. Ideal order book. Over 90%, or RM800m, of order book is for the ERL project. We value the core ERL project at RM0.25 sen DCF per YTL share.
2. Additionally, YTL is likely to benefit from ERL-related construction projects.
3. Pricing and ridership risks remain for the long-term project. Although we have incorporated reduced ridership and fares, actualisation risk remains.
4. Meanwhile, the Sentul Raya project will be revived. Gross developmental value –RM1.6b, RM2.5b in total proceeds over 10 years, target market now to medium to low cost property market.
Cement and Hotel Business. Decidedly still in doldrums.
Cement industry lacks pricing power due to gross excess supply, at above 40%. However, YTL Cement is partially protected thanks to YTL construction’s in-house demand of up to 70%. Contribution to FY01 pre-tax profit is deemed small.
Hotel & Malls in same dilemma. Near term lease renewal and occupancy the key. Despite continued room oversupply especially in Kuala Lumpur, Marriott registered occupancy circa rate 60%. Occupancy, lease expiry and rental collection remain significant risks for Lot 10 and Star Hill.