By A. Stephanie
MIDF Research has initiated coverage on YTL Corporation Bhd (YTL) with a “neutral” recommendation at a target price (TP) of RM1.68.
The local research house said that despite the company’s lacking immediate catalysts to earnings, it still expects YTL’s dividends to stay competitive.
Its analyst said: “Though YTL is exposed to diverse business operations across multiple countries in industries such as construction, information technology, hotel operations, cement, management services, property investment, and utilities, the family-run conglomerate’s base earnings are well supported by exposure in defensive sectors via its utilities business operation.”
“We believe the attractive high dividend yield of around 6% will provide support to its current price level. Nonetheless, lack of immediate clear catalyst at the moment caps its potential upside,” MIDF Research said, justifying its “neutral” call.
With a market capitalisation of RM17.4 billion, YTL is one of the biggest companies listed on Bursa Malaysia and derives 70% from outside of Malaysia.
Noting the stability of its utilities arms, MIDF noted that the division contributed about 74% and 50% to the local conglomerate’s revenue and profit before tax (PBT) respectively in the financial year ended June 30, 2014 (FY14).
“Nonetheless, contributions have been watered down over the years, credited to better performance from its other ‘growth’ divisions namely cement and property division which are more cyclical in nature,” the research house said.
Its analyst said the circa 6% dividend yield offered by YTL is one of the highest dividend yields among FTSE Bursa Malaysia KLCI (FBM KLCI) constituents.
“We view this high dividend return as an attractive element for investors to stay invested in YTL. Our target price of RM1.68 translates into an implied FY16 forward price-to-equity ratio (PER) of 13 times,” MIDF Research said.
Thus far however, the report noted that the company’s performance has been lacklustre thus far for the period ended Dec 31, 2014 (1H15). YTL’s revenue and PBT declined by 14.0% and 20.7% respectively compared to the previous corresponding period.
MIDF Research said this uninspiring performance could be attributed to a plethora of factors which include weaker revenue from construction division due to lower revenue recognition of construction contracts, as well as depreciations in cement manufacturing & trading division’s PBT on the back of intensified competition in the cement industry.
Other factors leading to subdued numbers are poorer revenue and PBT for property investment and development due to lower progress billings recognised from the Capers project in Sentul and lower net fair value gain on investment properties contributed by Starhill Global Reit.
YTL’s utilities division also saw revenue and PBT dip due to intense competition in the Singapore electricity market, resulting in lower contributions from its multi-utilities in the Lion City, MIDF Research said.
“On an optimistic note, its IT, hotel operations, and management services’s positive performance has helped cushion impacts from its underperforming divisions.
“This was due to increased revenue from assets under management from hotel operations, greater digital media advertising revenue, and higher interest income earned on cash deposits for its IT division and increased in share of associate profit for its management services division,” the report noted.
HSR a catalyst
MIDF Research remarked that despite reduced dependency on YTL’s utilities arm, this nevertheless presents the conglomerate with a stable earnings base.
“YTL provides investors with a combined exposure in both defensive and growth cycles of business. Its exposure in the defensive sector includes utilities, which provides a natural hedge for the company against fluctuations in its other business earnings cycles.
“Likewise, YTL’s involvement in the cyclical business, namely cements and property development, provides investors with opportunities to ride on any potential upsides to its business when the economy is booming,” the research house pointed out.
Its analyst added that the counter’s high dividend yield provides support to its current price level: “YTL caught investors by surprise with its generous dividend payment of 12 sen per share in FY14, which translates into a payout ratio of circa 80%. We attribute this to its rich cash flow generation and ability to upstream its cement division’s cash flow through privatisation in 2012.
“Assuming a similar payout ratio assumption, we account for a dividend payment of circa 10 sen thus implying a dividend yield of approximately 6%. We view this as particularly attractive as it would be poised to be one of the best dividend-yielding stocks amongst the FBM KLCI constituents, which generally average at 3% to 4%,” MIDF Research said.
The analyst also highlighted the Kuala Lumpur-Singapore High-Speed Rail (HSR) as a prospective earnings catalyst. The 350km track would purportedly reduce travel time from Kuala Lumpur to Singapore to 90 minutes compared to the current five hours by road.
Details, however, remain uncertain.
Taking note of indications that the project would require a minimum period of two years to design and tender out and a further five years for construction, MIDF Research said winning the project development partner (PDP) role or a substantial portion of construction works would substantially replenish YTL’s depleting construction order book.
Expiring power agreements
On the flipside, YTL has seen declining earnings from the expiration of Paka and Pasir Gudang power purchase agreements (PPAs). “With the expiration of its power plant, YTL Power faces a void in its earnings which need to be addressed.
“Although PBT contributions of these two plants are a small at 10% of YTL Power’s bottom line, we foresee a difficult time ahead for this division as heightened competition in the Singaporean merchant utility market could see its earnings decline further.
“Even as its earnings base remains stable due to contributions from its Wessex Water asset in the United Kingdom, we also believe that future accretive earnings from this division are limited, unless there is a merger and acquisition (M&A) or catalytic events such as winning a new power plant,” MIDF’s analyst said.
The research house also flagged overcapacity in Malaysia’s cement industry affecting YTL’s cement operations.
Risks to this arm would only arise should the current over capacity in production deteriorates further due to unexpected slowdown in demand. “If this were to happen, we foresee YTL Cement’s margin to be suppressed further as a result of intensified pricing competition,” MIDF Research remarked.
Moreover, as over 70% of the conglomerate’s revenue is derived from its overseas’ operations, the stock is exposed to fluctuations in ringgit against the Singaporean dollar and the pound sterling.
MIDF also noted: “As an investment holding company, YTL’s ability to pay dividends would lies on its ability to upstream cash from its operating subsidiaries. Therein, an inability to pay dividends on the part of its subsidiaries would impose a risk to our dividend forecast.
“Additionally, YTL might want to conserve cash for future M&As and as such may not maintain its FY14 payout ratio of 80%.”
At 3.40pm today, shares of YTL were trading unchanged at RM1.67.
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