Morphing into a large cap infra proxy

CGS CIMB, August 25, 2023

• We reiterate our Add call, raise FY24-26F EPS by 37-58% and lift our TP to RM1.91 (20% discount to SOP).
• We believe YTL’s twin growth engines of construction and cement make it a fitting large cap infrastructure proxy for Malaysian infrastructure.
• YTL Land said it will step up its launches in Sentul to tie in with MRT 3 rollout.

Reiterate Add, raising earnings and SOP-derived TP

Given YTL’s strong 4QFY6/23 showing with core net profit up 524% yoy and 31% qoq to RM450m, anchored by cement and utilities, we raise our FY24F-26F EPS by 37-58% to factor in our revised earnings for YTL Power and MCement and to build in some moderate assumptions for property launches. Our SOP-derived TP is also lifted to RM1.91. YTL trades at CY24F P/E of 11x and P/BV of 1x on our revised forecasts. This is still below its pre-2018 level of -1 s.d. from 1.1x P/BV, when net profits averaged more than RM1bn p.a. over FY12-17.

Taking a more constructive view on property

YTL Land is reviving its property business with the imminent launch of its high-rise Danau Puchong project with a gross development value (GDV) of RM200m (ASP RM550psf) and built-ups ranging from 566 to 999 sq ft. Management guided that YTL Land will also be stepping up launches in Sentul , where it already has strong branding, to coincide with the rollout of MRT 3. Hence, we are taking a more constructive view on its 165 acres of Sentul land bank, which we previously valued in our SOP at RM1.3bn or RM187psf (close to its BV of RM163psf). At present, there is an MRT station at Jalan Ipoh and Sentul Barat (part of the MRT Putrajaya line) and an LRT station in Sentul (part of the Ampang line). MRT 3 will have a station at Titiwangsa, which is one stop away from both Sentul Barat and Sentul stations (see Fig 6). In our SOP, we are now assuming NPV of development profits for Sentul based on a GDV of RM24bn (plot ratio of 6x and ASP of RM800psf), pretax margin of 15% and development duration of 15 years, giving us a value of RM3bn.

Robust large cap Malaysia infrastructure proxy?

YTL is one of two larger capitalisation construction stocks listed on the FBM100, the other being Gamuda. YTL has twin engines of growth via its construction and cement arms. We believe YTL together with MCement represents a more direct large cap and liquid proxy to the Malaysian infrastructure space than Gamuda, which has successfully diversified out of Malaysia (72% of RM21.5bn orderbook overseas as at Apr 2023). YTL had an outstanding orderbook of c.RM2.5bn as at end-Jun 23. It is the lowest bidder for the CMC302 package for MRT 3 worth RM11bn and, assuming it manages to bag this, its current orderbook will expand by more than fourfold to RM13.5bn (vs. Gamuda’s up lift o f 31% assuming it wins the MRT 3 tunnelling scope). An added bonus is the revival of the KL-Singapore highspeed rail (HSR) project, where we think YTL is the frontrunner as it is one of five parties shortlisted and has prior experience with the Gemas-JB double tracking project.

Growing presence in local infrastructure

Raising FY24-FY25F EPS

We summarise the changes in our FY24F/FY25F/FY26F revenue, EBITDA and net prof it forecasts in Figure 1. The majority of our EPS upgrade is due to our higher earnings assumptions for YTL Power and MCement as per our report dated 14 August 2023, “Earnings upcycle at nascent stage” (https://bit.ly/3KRfF1J). We also pencil in new property launches of RM400m per year for FY24-25F on margins of 15% and raise our FY24-25F construction new order win assumptions to RM3bn-4bn per year (vs. RM2bn per year previously).

Lifting SOP-derived TP to RM1.91

We also lift our SOP-derived TP to RM1.91 based on an unchanged 20% discount.

Our higher SOP now factors in:-
i) Our higher TP of RM2.40 for YTL Power (vs. RM1.70 previously).

ii) Our higher TP of RM5.55 for MCement (vs. RM5.08 previously) while imputing a value of RM1.3bn for the non-listed cement business comprising its Vietnam and Singapore terminals, and Indonesia land and office, which are held under YTL. The bulk of the value is from Vietnam, based on EV/EBITDA of 10x sustainable EBITDA of US$30m.

iii) Starhill Global REIT at CGS-CIMB’s TP of S$0.62 (vs. market price previously).

iv) 10% higher valuation for its hotel and restaurant business based on recent f igures. Our last valuation was based on June 2021 numbers.

v) For property, we have taken a more constructive view of its Malaysian land bank and, in particular, its 165 acres of Sentul land bank, which we previously valued at just RM1.3bn or RM187psf (close to its book value of RM163psf). We understand f rom management that YTL Land will be stepping up its launches in Sentul to coincide with the rollout of MRT 3; we believe MRT 3 contracts should be awarded by year-end.

We are now assuming NPV of development profits based on the following parameters (GDV of RM24bn based on plot ratio of 6x and ASP of RM800psf, pretax margin of 15% and development duration of 15 years), giving a value of RM3bn.

vi) Higher valuation for its construction business. This is now based on sustainable orderbook of RM8bn (vs. RM6bn earlier) and pretax margin of 5% which we think is fair given the greater clarity on order flows post the state elections. Our RM8bn orderbook assumption factors in half of the potential win of RM11bn for the MRT 3 CMC302 package and nothing further f rom HSR, internal property projects, data centres and other industrial warehouse projects. It was also reported in the Edge recently that KDEB Waste Management, a wholly-owned unit of state-controlled Menteri Besar Selangor, is partnering YTL Power to build a RM4.5bn, 2,400 tonne per day waste to-energy plant in Rawang. It is likely that YTL will be doing the construction works, in our view.