Analysts' Recommendation

JPMorgan: YTL Corp Buying 26% of Macquarie Prime REIT and 50% of REIT manager; 'Overweight', Target Price RM9.80

Asia Pacific Equity Research, 28 October 2008

YTL Corporation
Price Target: RM 9.80

Buying 26% of Macquarie Prime REIT and 50% of REIT manager - ALERT

YTL is paying S$203MM, or 0.82 cents per unit, for a 26% stake in Macquarie Prime REIT (MPR) and S$62MM for a 50% stake in the REIT manager, Prime REIT Management Holdings (PRMH). In addition to this it has agreed to pay the vendor Macquarie Bank Ltd a S$20MM service fee for advice and strategic recommendations relating to the ongoing management of a global REIT platform. The total transaction is therefore S$285MM which would be wholly financed by internal funds in YTL, namely the US$300MM five-year exchangeable bonds sitting at the company holding level issued in May 2007.

Given the appreciating US dollar, the valuation of MPR at a 49% discount to its book value, and the management fees of PRMH, we believe the transaction is a good deal. The dividend yield is expected to be 9.5% based on J.P. Morganís DPU estimate for MPR in FY09.

The rationale for this recent transaction apart from the investment returns and the opportunity to gain exposure to prime retail assets in Orchard Road (MPR owns 74% of the strata title lots in Wisma Atria and 24% of Ngee Ann City) is to use MPR as a vehicle for a global retail REIT using the Starhill brand, where MPR indirectly owns seven properties in the prime Tokyo areas of Aoyama, Roppongi, Harajyuku, Meguro and Ebisu as well as in Chengdu, China. YTL has already struck Starhill retail management deals in Dubai. It is uncertain how YTLís 51%-owned local flagship Starhill REIT will feature in the global structure but extending the franchise in the face of possible opportunities in prime retail assets being made available is timely.

We believe this latest M&A transaction is just the beginning of YTLís acquisition and deal-making trail in the face of possible unprecedented global asset deflation and limited availability of credit. With M$8B in cash in YTL Power and with excess capital in nearly all of the groupís listed subsidiaries, this is an environment in which YTL should thrive as demonstrated in the period following the Asian Crisis Ė whether it is buying Lot 10 and Marriot (now in the local Starhill REIT) at 20% below replacement cost to YTL Powerís acquisition of Wessex Water from the insolvency of Enron. This was a period in which YTL shares traded as much as an estimated 20% premium to its RNAV. Our current Jun-09 M$9.80 PT is based on a 20% discount to YTLís RNAV. Risk to our PT is a potential de-rating of YTL Power (as it underpins the RNAV of YTL) on the back of the depreciation of the pound sterling.