Kim Eng: Upgrade YTL Corp to BUY; target price RM7.00
Kim Eng Research, 13 November 2006
YTL Corporation Berhad
Target price: RM7.00
KLCI Index 1022
YTL Corporation (YTL) Group Managing Director Tan Sri Dato’ (Dr.) Francis Yeoh hosted a briefing for analysts last week, outlining the group’s growth strategy and capital management initiatives in the coming years. Whilst not many details are divulged for competitive reasons, the most important message is that YTL shareholders could sit tight and wait for many sweet deals in the coming years. Firstly, cash dividends will double from the usual gross RM0.075 to at least RM0.15 starting from FY07, and this has started with the surprised interim gross dividend of RM0.075 (going ex on 15 Nov 2006) for FY07, a departure from its usual practice of one final dividend. Secondly, restricted offers for sale (ROS) of YTL Power International (YTLPI) and/or shares of listed subsidiaries at attractive discounts could be an annual affair for YTL shareholders. On going is the proposed ROS to YTL shareholders (excluding shareholders (a) holding YTL shares through Japan Securities Depository Centre Inc. and (b) having a registered address in any other jurisdiction outside Malaysia) of 1 YTLPI share at RM1 (market price of RM2.22) for every 10 YTL shares. Further, YTLPI will at least maintain its gross dividend of RM0.10 and make the distribution of treasury shares as dividend-in-specie an annual affair. All these efforts will lift cash and non-cash dividend yield on YTL from a paltry ~1% in FY06 to near 4-5% in FY07 and beyond.
YTL is superbly confident of bagging the Kuala Lumpur-Singapore bullet train project, costing at least RM8b. Construction profits alone will add RM192m or ~30% to our forecast for FY08, on a conservative margin of 10% and a construction period of 3 years on a fast-track basis. Besides this, YTL is close to securing construction projects worth at least RM1.6b, in line with the pump-priming efforts by the government under the 9th Malaysia Plan.
EPS marginally raised by 6-7%
We have marginally raised our FY07 and FY08 EPS estimates by 7% to account for the construction contracts, but excluding the proposed bullet train project. Our projections include a small exceptional loss and a slight earnings dilution from YTLPI that will result from the proposed ROS of YTLPI shares to YTL shareholders. Core earnings growth will be a decent 6-7% p.a. in the next 2 years, until YTLPI (the group’s dominant earnings driver) secures new capacity expansion and/or regulated assets in the region.
Dividend awakening – Trading BUY
We have upgraded YTL to TRADING BUY on (a) yield accretive dividend policy that addresses one of the shortcomings of the stock, and (b) basic RNAV of RM6.50, based on market prices for its subsidiaries and investments. Our target price for YTL is RM7.00, based on basic RNAV plus a small premium for the potential bagging of mega projects. Also it would also not be a surprise if YTL distributes its treasury shares (152m as of 10 Nov 2006) to shareholders in 2007, like the distribution in specie of 1 for 15 that it did in 2005. This alone would add 6.7% to the stock.