Phillip Capital Management Sdn Bhd, march 17, 2015

Earnings stability underpinned by diversified businesses
YTL Corp is a diversified infrastructure conglomerate with business portfolio spanning across seven segments including utilities, cement, property, management services, IT & e-commerce, construction and hotels. Its utilities arm is the largest contributor in terms of topline and bottomline follows by property and cement unit. For the utilities division, 57% subsidiary, YTL Power International (YTLP) is the first independent power producer (IPP) in Malaysia with its contracts expiring in Sept 2015. Apart from Malaysia, YTLP maintains its presence in Singapore (via Power Seraya), Indonesia (via PT Jawa Power, the 2nd largest Indonesian IPP), Jordan (Eesti Energia), etc. In 2002, YTLP acquired Wessex Water, a water and sewerage asset in UK, from Enron for USD1.3b. Under the property segment, YTL Land owns approximate 1,000 acres of landbank in the Klang Valley, Perak and Pinang. Its signature project, the 294-acre Sentul Masterplan has a GDV of RM13.3b based on the valuation of RM1k psf.

Cement capacity rise and ERL extension
For intermediate term, the earnings growth drivers are the 1.8mt/yrl capacity expansion from YTL Cement (YTLC) and the growing ridership from the 2.4km extension of ERL to KLIA2. In FY14, the commissioning of 4th integrated cement plant had added another 30% of its total production capacity which would have spurred its market share from 23% to 29%. For 1HFY15, the pretax margin for cement division contracted by 5ppts to 20% amid the capacity expansion. Despite facing the stiff local competitions and potential price-war, we see that YTLC should further enhance its market presence due to its premium product offerings.

Benefit from weaker ringgit
On the other hand, the easing of global fuel price and depreciation of MYR currency should boost its earnings generated from overseas, particularly operations in UK and Singapore.

Lower capex spending entails higher dividend payout
Given the winding down of capex cycle on YTLC, it enables the group to pay higher dividend. For FY14, YTL had declared 12sen dividend, translating into an attractive dividend yield of >6% from payout ratio of 80%. We view that the dividend payout trend likely to continue due to limited capex spending in the future and its flexible financial position with large cash balance of almost RM14b. Its strong cash generating machine, YTLP resumed its current dividend payout at 55% (vs 7% in FY13) is another contributing factor.

Eyeing for HSR project
YTL group may secure for the tender jobs for the RM30/40b KUL-SIN High Speed Rail (HSR) project. Its experience in developing airport ERL may lean the support in winning the job of the nation’s high profile HSR project. The private finance initiative (PFI) or public-private partnership (PPP) models maybe adopted due to the government’s eagerness in tackling budget deficit. Land Public Transport Commission (SPAD) has marked 4Q15 as the targeted tender period for HSR. The announcement of HRL job tenders is the key focus among the investors.

YTL Corp share price is now at the bottom of RM1.75 to RM1.55 range and it is now at a good entry level. Although the earnings growth of YTL Corp is not exciting it does has some attractions: (i) its diversified business portfolio ensures earnings stability, (ii) attractive dividend yield of >6.0% and (iii) it is now trading at undemanding consensus PER-FY16 of 12.0x, below its historical 5 years average PER of 14.0x. At the current entry level, we reckon that this represents a buying opportunity for those investors who keen on this diversified conglomerate.