Construction poised to be YTL’s new earnings catalyst

YTL Corp Bhd
(June 5, RM1.70)
Maintain add with target price of RM2.42: After many years of expanding its footprint abroad, YTL has shifted its focus back to the home front to reap the value of its investments across Malaysia’s infrastructure cycle, spurred by the nation’s Economic Transformation Programme (ETP).

We upgrade our financial year 2015 ending June 30 (FY15) and FY16 earnings per share forecasts by 6% to 8% as we factor in the construction earnings from the recent Track 4A power station concession which the Energy Commission had awarded to a consortium led by YTL Power International Ltd.

Our target price, based on a 20% discount to revised net asset value, is raised by 24% as we revalue YTL’s cement business on enterprise value (EV)/earnings before interest, taxes, depreciation and amortisation from EV/tonne to better reflect its position as a key growth catalyst. YTL remains an “add” and is one of our top picks.

Our recent meetings with management underscored the theme of YTL shifting its focus from growth via acquisition abroad to growth via execution at home.

While quantitative easing had crowded out the commercial returns of prospective mergers and acquisitions, such as YTL’s attempted bid on London’s Stansted Airport, opportunities at home have grown in abundance on the back of initiatives under the government’s ETP.

Construction is poised to be a new powerful earnings catalyst for YTL, kicking off with the recent award of the Track 4A project. YTL should benefit from the construction of the RM6 billion project. Its order book could also swell further with the possible award of the RM8 billion Express Rail Link (ERL) extension to Melaka and RM30 billion high-speed rail link to Singapore.

At 10.3 times FY15 price-earnings ratio, YTL’s valuations are the cheapest among the conglomerates under our coverage not just in Malaysia but in the region. Valuations are compelling, taking into account further potential earnings upside coming from a growing order book, higher passenger numbers on the ERL to klia2, and the turnaround of its 4G mobile broadband division with the roll-out of its time division-long-term evolution services over the next two years. — CIMB Research, June 5

This article first appeared in The Edge Financial Daily, on June 6, 2014.