YTL Corp's 45%-owned ERL
KUALA LUMPUR: YTL Corporation Bhd
’s core net profit for the first half ended Dec 31, 2017 was below expectations due to higher finance cost, says CIMB Equities Research.
The research house said on Monday margins for the construction and cement divisions dropped due to depleting construction order book and cement price competition.
“YTL continues to target up to RM12bil of outstanding order book by end-CY18. It is tendering for all three major packages for the KL-Singapore High-Speed Railway (HSR) contract.
“Add maintained but trim target price to RM1.68. FY18-20F EPS cut on higher finance cost,” it said.
CIMB Research said YTL’s 1HFY18 core net profit made up 36% of its full-year forecast and 45% of consensus.
“We deem the performance to be below our expectations as 2H18 is unlikely to deliver a significant jump in earnings given the higher finance cost and depleting construction order book.
“Overall revenue grew 10% on-year but core net profit contracted 0.2%, dragged by higher tax rate. No dividends were declared, which was expected,” said the research house.
It said there were no major surprises in 1H18 segmental revenue.
For the cement and construction, both segments’ revenue grew by 14-17% on-year. However, construction pretax margin fell to 19% (39% in 1HFY17) due to higher operating cost and depleting order book.
Cement margins also contracted to 19% (1HFY17: 27%) given the stiff competition, but this was offset by effective cost control.
Hotel pretax profit fell the most, down 89% on-year, due to renovation cost for Marriot Hotel.
For CY18, the group is targeting a significant jump in outstanding order book of up to RM12bn (RM400m currently).
“While the press had recently reported that the group secured the RM8.9bn Gemas-JB rail project contract (via a JV with SIPP Rail Sdn Bhd), the group has yet to make an official announcement, which we suspect, is still pending the finalisation of the details of the contract,” it said.
CIMB Research said its EPS forecasts, RNAV and TP have not incorporated the estimated RM500mil in incoming gross profit based on 10% margin
It also said YTL has now emerged as one of the five known JV/consortiums that are bidding for the project delivery partner, operating company and AssetsCo tenders for the HSR project.
“While it remains to be seen if YTL or 45%-owned Express Rail Link (ERL) Sdn Bhd would be looking to rake in foreign partners for its HSR tenders, we believe the group would leverage its existing domestic partnerships.
ERL is currently 45%-owned by YTL Corp, 36% by Lembaga Tabung Haji, 10% by SIPP Rail Sdn Bhd and 9% by Trisilco Equity.
“We are optimistic on YTL’s chances to bid for the KL-Singapore HSR’s rail operating company (OpCo) tender, which would be more relevant to YTL Corp, in our view, given its experience in the 45%-owned ERL – the sole domestic high speed rail service concession built at only RM35mil a km cost - arguably the lowest cost in the region.
“We cut FY18-20F EPS by 8-17% as we impute the higher-than-expected interest expense for its utilities business. Target price is trimmed to RM1.68 as we update for the market value of listed entities, still pegged to a 10% RNAV discount.
“Maintain Add due to YTL’s renewed construction outlook. Imminent announcement of the Gemas-JB rail win, other rail contracts, and new HSR tender details are key catalysts. Downside risk is low tender success rate. A 5%-6% dividend yield should lend support to the share price,” it said.
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