YTL Corporation Berhad - Construction Unit Revival Coming After All

MIDF Research, August 1, 2018

Target Price: RM1.55

Gemas-JB going full steam ahead. Post-meeting with the Johor State Government, the Minister of Transport announced that the GemasJB double tracking project will proceed as scheduled. In fact, there is the possibility of expansion to the project scope with additional stations versus the current planned 12 stations.

To recap, the Gemas-JB double tracking worth RM8.9b was awarded to a Chinese consortium comprising China Railway Construction Corp, China Railway Engineering Corp and China Communication Construction Consortium Sdn Bhd. The project involved 197km of double tracks, stations, electric trains, depots, land viaduct, bridges, electrification and signalling systems. The project is scheduled to complete in Oct 2021. We had post-elections, conservatively excluded the Gemas-JB double tracking project from our forecasts given the PH Government’s intention to review major construction projects. The latest development is a positive to YTL.

Major expansion to orderbook. The addition of the Gemas JB project (we estimate YTL’s share of the contract at RM8b) on top of construction of the group’s Tg Jati power plant in Indonesia (estimated construction value of RM4b) will provide a massive expansion to the group’s orderbook from the current RM400m to some RM12b. Gemas-JB is understood to be already underway (20% progress) while Tg Jati construction is expected to commence early CY19F. Both the projects are estimated to enhance group earnings by 19%/26% over FY19F/20F.

Spillover benefits for cement division. YTL Cement is a key beneficiary of the construction division’s orderbook expansion. We expect a combination of the Gemas-JB rail job and the construction of Tanjung Jati plant to lift YTL Cement revenue by some 12% (or RM300m/annum) on full year basis (likely from FY19F on) as supplies for both projects will be sourced from YTL Cement. For Tanjung Jati, YTL is looking to export clinkers into Indonesia with a local grinding plant to be setup to complete the process. YTL Cement’s solid balance sheet backing of a net cash of RM1b, positions the group well for acquisitive expansion both locally and overseas.