YTL Corp: Earnings momentum to continue

CGS CIMB, June 7, 2023

• Reiterate Add with a higher SOP-based TP of RM1.28 as we lift our FY23-25F EPS by 12-64% on better earnings for YTL Power and MCement.
• YTL is an underappreciated cash-generating conglomerate with utilities, cement and construction as its medium-term growth engines.
• Construction opportunities include MRT, industrial warehouses and HSR.

We reiterate our Add rating on YTL and maintain it as one of our top picks. Given its strong 3QFY23 earnings driven by cement and utilities, we are raising our FY23F-FY23F EPS by 12-64% to factor in our revised earnings forecasts for YTL Power and MCement (See Figure 1).

YTL trades at CY24F P/E of 11.5x and P/BV of 0.7x on our revised forecasts, anchored by a strong earnings recovery from a core net loss in FY22. From a P/BV angle, this is still below its mean levels since January 2012. (See Figure 2).

YTL has consistently paid cash dividends, except for FY20. We expect higher dividends in FY24F-25F, supported by 1) stronger cash flow generation from its utilities and cement, 2) potential cash from injection of assets into the REITs, 3) dividends from its construction business, and 4) lumpy cash inflow from its Singapore development 3 Orchard By-the-Park in FY23-24F.

As we expect stronger cash flows, we raise our FY24F-25F DPS to 6 sen per year vs. 3 sen previously. We believe the potential dividend payments from the YTL group of companies, listed and non-listed would be more than sufficient to support our DPS forecasts (see Figures 4 and 5). This earnings visibility driven by recovery in cash generating utility profits is rare for a large cap liquid proxy in Malaysia, in our view.

In line with the increase in our earnings forecasts, we also lift our SOP-derived TP to RM1.28 from RM1.00 previously. This factors in
i) Our higher TP of RM1.70 for YTL Power (vs. RM1.40 previously)
ii) Our higher TP of RM5.08 for MCement (vs. RM3.97 previously)
iii) Valuation of its construction business based on a sustainable orderbook of RM6bn and pretax margin of 5% for FY23F-26F which we think is fair given its current orderbook of RM3bn as at end- 3QFY23 and promising prospects for new orders from internal property projects, MRT 3 and other industrial warehouse projects. We used a FY25F P/E of 12x construction profits previously.

What’s the attraction of YTL?
YTL’s share price has performed well, up 61% YTD vs. KLCI’s -7%, but we think investors are still overlooking an established conglomerate with a long history in Malaysia. We see a few catalysts unfolding for the stock which we think will narrow the deep discount of 74% to our SOP value of RM1.60 (our TP of RM1.28 based on a 20% discount).

On top of a YTL Power’s strong earnings recovery, we think YTL has many other strong attributes.

Construction flows to pick up, HSR an added bonus
YTL currently has an outstanding orderbook of RM3bn as at 31 March 2023. Comprising mainly Variation Order (VO) for the Gemas-JB double tracking project which is to be completed by 2025, 48MW data centre for Sea Limited, contract to build two mega warehouses in Klang, and the first phase of the UK Brabazon development.

Future contract flows look promising, in our view, as it is tendering for the larger MRT 3 above ground CMC302 civil work package (as compared to the smaller CMC201) and is believed to have put in the lowest tender at under RM11bn, according to The Edge. Besides this CMC302 package, it is also bidding via its JV with SIPP Rail (YTL-SIPP JV) for the systems turnkey package for MRT 3 where it will be partnering China Railway Construction Co Ltd (CRCC) which will be the OEM partner. This systems turnkey package, which includes signalling, electric train and depot equipment, power supply and communication systems, is expected to be worth RM7bn-10bn according to a recent Edge article.

An added catalyst for YTL and MCement is the revival of the KL-Singapore High Speed Rail (HSR). The Ministry of Transportation, Anthony Loke was quoted by which The Edge recently as saying he is open for the revival of the project but it must be led by the private sector. Prior to the 14th General Elections (GE14), YTL together with Lembaga Tabung Haji was awarded the Project Delivery Partner (PDP) role for the southern section of the project. Prior to the cancellation of the 350km HSR in January 2021 for which Malaysia paid a RM320m penalty to Singapore, YTL had proposed to fund the project in exchange for a long-dated concession with an alternative route from KL to JB and for Singapore to come in a later stage. YTL is one of five companies shortlisted for a possible revival of the HSR, according to a recent article by the Edge.

Meanwhile, we believe YTL’s maiden foray into the construction of warehousing projects in late 2021 is the first of more to come. One of YTL’s business associates announced in late 2021 it was acquiring 89.3 acres of land from Boustead in Bukit Raja for RM147.8m or RM38 psf. For Phase 1 alone which will be over 39 acres, Shopee warehouse has signed a 12-year tenancy with rental escalation every 3 years for 1.42m sq ft of NLA. YTL was awarded the construction contract which should drive construction earnings over the next few years.

Cement business on a stronger footing
MCement’s current effective integrated capacity is 15m MT of cement p.a. assuming the closure of its Rawang plant due to its inefficient nature while its Kanthan plant in Perak is running at half capacity according to the company. Most of the low hanging fruits from the integration exercises with YTL Cement – such as synergies in logistics, distribution and procurement while also elimination of duplicated functions and corporate overheads – have been done. More capex will be needed in the coming years to make some of the legacy plants under La Farge become more efficient and on par with YTL Cement’s, in our view.

3QFY23 revenue (Jan-Mar 23) grew 25% yoy and 10% qoq. We understand this was more ASP driven but there was some growth in sales volume as compared to 2QFY23 sales volume which fell by 3% qoq.

We expect demand for cement to pick up pace in 2H23 as the property market gradually recovers and major infrastructure projects such as MRT 3 is rolled out. MCement’s average selling prices for cement have moved up by 11% over the past 6 months to RM410-420/mt and assuming rebates of RM50/mt based on our estimates net ASP of RM360-370/mt. MCement’s strategy is to move up its net margin to RM100/mt and given the high operating leverage of the industry, group cement EBITDA may reach RM1bn once this happens compared to RM178m- RM447m in FY21-FY22. We also understand the current pricing environment is better with the smaller players being less disruptive in terms of price undercutting. The labour shortage in the past two years have also improved.

We also believe the cement industry may be at an inflection point because of potentially more consolidation. Bloomberg reported in February 2023 that Khazanah is weighing the sale of Cement Industries of Malaysia (CIMA) which may be positive for the industry in the longer term. According to the article, CIMA posted a net loss of RM63m for FY21 and has a RM205m shareholder loan still outstanding. Given the state of CIMA’s financials, we believe it may be difficult to find a buyer for CIMA and it will take time to turn it around, making it a less competitive proposition for the acquirer as compared to the market leader MCement.

MCement expects to pay maiden dividends in FY24F post the injection of YTL Cement’s business into the listed entity.

Data centres: another growth engine and housed under YTL Power
We expect YTL to clinch more projects to build data centres as there has been a proliferation of data centres in Johor over the past few years given the scarcity of available land in Singapore for multinationals to expand according to Juwai IQI, Asia’s largest real estate technology company. The group’s data centre arm is housed under YTL Power. YTL Power in Apr 2022 announced plans to develop the nation’s first 500MW green data centre park in Johor powered by solar energy. The park will offer data storage colocation services to clients looking for more sustainable and lower-carbon solutions within the Southeast Asia region. It is also adjacent to 1,500 acres of land that will be used to set up solar farms. YTL Power has earmarked up to RM15bn to develop this park.

In April 2022, YTL Power subsidiary YTL Data Center Holdings Pte Ltd announced the development of a 275-acre data centre campus in Kulai, the largest data centre park in Malaysia. Construction has started for the first phase of the data centre, a Tier-III certified facility able to accommodate up to 72MW of capacity; the building’s main anchor tenant SEA Limited has committed to take 48MW. This phase is slated to be completed by 1Q24 and will be a three-storey facility with 24 data halls, as well as office space, storage, and parking facilities.

This 48MW for the first phase IT load hyperscale date centre in Kulai will cost RM1.3bn and this contract has been awarded to YTL. With the lower land cost in Johor vs. Singapore, we estimate EBITDA margins to operate a data centre to be at c.50-60%. Using YTL Power’s first Singapore asset acquired via DODID Pte Ltd which yielded about RM1m per MW, and factoring in the lower land and energy cost in Johor, pretax profit for this first 48MW should be at least RM48m, in our estimate. We understand from the company that salaries are the biggest cost factor for a data centre accounting for about 40% of COGS in FY22, followed by energy and water and cooling at about 20% of COGS in FY22. YTL Power’s 70%-owned SIPP Power owns the Kulai land and will be providing utilities and water supply.

YTL DC South, a wholly-owned subsidiary of YTL Power has secured RM1.1bn in Islamic term financing from Maybank and OCBC for the 48MW IT load hyperscale data centre in Kulai. This also ticks the ESG box as the facility will be the group’s first green facility and the group targets to secure Gold LEED Certification for it.

Besides Sea Limited, GDS Holdings Limited (GDS), a leading operator of data centres in China according to its website, will co-develop with YTL 168MW of capacity across eight data centre facilities in the park. We understand the equity structures have yet to be finalised but GDS will be bringing in its own customers and raising its own capital for the project. This commitment by GDS was part of the RM170bn in investments from China announced by Prime Minister Anwar Ibrahim during his trip to China in early April 2023.

In our view, having blue chip partners such as Sea Limited and GDS for the YTL Green Data Center Park augurs well in attracting future deals with other companies and also help open doors to secure more financing from other financial institutions.

Property boost from Singapore
YTL Land’s near-term profits is also expected to receive a boost from the booming Singapore property market based on recent sales guidance by the company. This relates to a legacy project completed in 2017 called 3 Orchard By-the-Park near the Singapore botanic gardens. The project was a redevelopment of the former Westwood Apartments which YTL Land purchased en bloc in 2007 for S$435m or S$2,525 psf.

The timing for the project was less than desirable as the Singapore government started imposing additional buyer’s stamp duty (ABSD) of 30% on unsold properties after five years from the date of acquisition of the land in 2011. Given the slow sales and the risk of being penalised by the government for unsold units, the project was in 2021 sold en bloc to a group of Singapore investors who bought the remaining 50 units out of the total 77 units. This was done by acquiring the development company, YTL Westwood Properties and assuming all its assets and liabilities.

The deal priced the 50 units at S$3,100 psf but gave YTL the opportunity to share in the profits if the units sold for more than S$3,100 psf. We understand from the company that based on the sales thus far, the average selling price is S$4,000 psf and YTL will be recognising S$15m in cashflow for FY23F and a further S$50m in FY24F.

Paring down holding company debt
One of the biggest drags for YTL is its holding company debt of RM14.4bn as at 30 Jun 2022. Most of this debt is held under management and investment services, where profits have generally been more volatile. Of the total holding company debt, about RM5.4bn can be attributable to YTL, mostly comprising the cost of acquiring minority stakes in new ventures, Express Rail Link (ERL), restructuring for M&As, and also to fund dividend payments. The balance RM9bn is debt held at the YTL Power level, which we believe had been used to fund its telecommunications business, Yes 4G and other businesses overseas. The challenge for YTL is to generate meaningful profits for these businesses in a bid to eventually pare down this debt. We understand ERL’s profits are improving, while the group is looking to address the debt issue with the sale of peripheral assets, as has already happened to some extent.

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