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Saturday August 28, 2010

Discovering the true value of YTL

IT’s an oft-told story about how YTL Group managed to stay resilient during the Asian Financial Crisis even as many large corporations became casualties of the crisis buckling under debilitating debt. That story, more often than not, is narrated by no less than the group’s chief steward Tan Sri Francis Yeoh.

It’s about how the group, by sourcing funds locally and borrowing in ringgit (as opposed to US dollar, which most businesses had done), had managed to fend off the heat of the crisis. So, while so many companies fell off the corporate sidewalk, YTL, armed with an enviable war chest of cash, went trawling to buy up assets on the cheap. Lest we forget, that’s how he scooped up UK’s major sewerage and water specialist Wessex Water over a decade ago, which today is one of its prized assets.

He also frequently enthuses over the level of service provided by the leisure and hospitality group under his stable; how guests are pampered by first class services at third world prices.

But over the years, the lingo has shifted somewhat towards blue ocean strategy and technology. Understandably, Yeoh is passionate about WiMAX 4G and how the offering will change the way consumers think, work and play. That is the group’s new playground. If executed to plan, it could just be the group’s next great feat.

“This is a new business and a very important business (telecoms),” says Yeoh, YTL Corp’s managing director.

YTL Corp Group is today largely an infrastructure player with 12 million customers with businesses spanning three continents. It has five listed companies, excluding the REITs, within its stable and for the first time in its corporate history, revenue reached a whopping RM16bil. Net profit was RM873mil for the full year ended June 30, 2010.

This is a blue chip group with a market value of some RM34bil. Combined, the group has assets worth RM45.4bil and a war chest of RM12bil cash.

Yet investors’ response to YTL Corp appears to be lukewarm at best.

“I don’t have a Buy call on YTL Corp and I think at the current price it is fairly valued. It is not as sexy a story as its power and water units. But it does have stable earnings and dividends given the layers of profit and cashflow from its units,’’ says an analyst. On Friday YTL Corp shares closed one sen lower to RM7.44.

The new frontier

The transformation is already in motion. The group prides itself for adopting the blue ocean strategy – which means going where none of their competitors have ever been. As a result, it has a lot on its plate going forward.

WiMAX, for now, appears very much on the priority list of the group’s next frontier.

“It is a very big thing, the public will gain and the nation will change when we take it to town in November. The other telcos will have no choice but to be fully immersed in 4G. 4G is coming, it is a challenge and it will be fantastic,’’ says Yeoh.

Shake the market and set new benchmarks, it definitely will. YTL is using Malaysia as the test bed for WiMAX 4G. If it gets it right, the model will be replicated elsewhere across the globe. That would make it the biggest player ever to deploy WiMAX extensively.

“Partners will come to us once we prove it’s successful. I am sure all of the Asean countries (will come) and we will also get invited to expand. Our global footprint will grow and that is the kind of growth targets (we are looking at),’’ he adds.

It is not just the voice, data, video and mobile business that the group has the potential to be involved in but the whole gamut.

The World Bank conducted a study last year on the impact of broadband on the economy and found that every 10% penetration growth in broadband creates a 1.38% corresponding GDP increase in developing countries.

“Every thing that we do from 1955 (since the group’s inception) has been based on the blue ocean strategy. This is our biggest initiative,’’ he says.

The involvement in WiMAX 4G presents a perfect picture of its involvement in the utilities sector.

Besides 4G, there are areas in the water and energy business that the group wants to expand into.

The journey

The group’s history dates back to 1955. It started as a construction company, building low-cost apartments to pioneering high-rise construction. Back then, the group needed to arrange financing for these apartments.

It was the expertise and use of technology that thrust them to the forefront of construction and YTL became the first turnkey contractor in the country. Yeoh says they were the envy of the Japanese contractors, who took three weeks to complete a floor of a building while YTL only needed seven days.

“The secret was really in the continuous pouring of concrete to hasten the process,” he says.

The KL Tower which stands tall today in the city’s skyline is a product of continuous pouring of concrete, hence its early completion. YTL had the foresight to own a cement plant that helped them manage cost.

The going was extremely good for the construction business. Then the group got another break in the early 90s following the nationwide blackout. That marked their first step into the lucrative utility sector. YTL was the first independent power producer (IPP) and managed to build a plant in a record time of 14 months. But this happened in juxtaposition, with the vociferous criticism that the IPP awards were not given out on open tender basis and the rates were unseemingly high, placing the national utility Tenaga Nasional Bhd at a great disadvantage given its high payouts to the IPP for power generation.

To fund the plant, the group opted to issue ringgit-denominated bonds, which was frowned upon by some.

“Nobody then wanted to listen to us but we believed that Asian infrastructures should be funded by their own savings rate. Asians are savers, why should we borrow from outside?’’ he says.

Over the years, the group has managed to strengthen its portfolio in the utility segment, adding more power plants such as PT Jawa and Power Seraya Ltd. Its generation capacity has grown many-fold from 1,000MW to 4,315MW. It has also gone into the power transmission business with a 33.5% stake in Australia’s ElectraNet.

An opportunity to own water assets came with Wessex Water in 2002. It was a major coup to own a British company then. From then on, there was no stopping for this group which grew and spread its wings via acquisitions.

But as Yeoh puts it: “All that is history, let’s talk about the future.’’

IPPs a ‘jurassic model’

Abundant opportunities in the water and power sectors in Australia, Britain and Asia are currently beckoning. “We want to play a bigger role where the future is brighter,’’ he says.

Regulatory frameworks are changing to open up markets for competition and allow more players to participate so that there are choices; with competition, the cost of services for end users generally come down.

“The chances of Asia going that way is better,’’ he adds.

An analyst says until and unless the group acquires more assets there is not going to be a big jump in earnings. The talk is that they are eyeing water and energy assets in Asia and given the big war chest of cash it has it should stock up sooner than later.

“They are actively looking for power and water assets in the region, it would be the regulated ones,’’ says an analyst.

Yeoh feels the era of IPP is over. He calls it a “jurassic’’ model to create a power plant to serve only one customer.

“We trade energy, we produce and sell power. We are no longer an IPP and we believe the IPP business is over. We also think there should be no more IPPs,’’ he says.

His belief is that governments should do away with monopolies and introduce competition, allow the players to compete to supply power to the grid.

“Anyone can be a power producer and supply to the grid and that will create competition and allow consumers to chose the cheapest source of power,” he says. Whether this formula is workable remains to be seen but his rationale is that if Singapore can, why not Malaysia?

“If there can be competition in the water and telecoms sector, why not introduce it for the power sector (to make players more efficient)? It is better for the public as they will have choices,’’ he says.

“We want to cut a bit more in power business. We want to be a total energy power player.”

On high speed

The mere mention of the proposed KL-Singapore high speed rail link excites him. He is not ready to give up on his proposed project although things have been pretty quiet at that end. If the project sees the light of day, he says, it would create value not just in property but also spur economic benefits at both ends – Malaysia and Singapore.

“I always believe that if people want it, it will happen,’’ Yeoh says.

The group’s hospitality business has grown with recent acquisitions and the creation of REITs.

And don’t rule out more assets coming into this stable. The group bought The Muse Hotel in Saint Tropez in France, which has become one of Europe’s 20 most popular hotels, the Niseko Village – a ski resort in Hokkaido, Japan that has become the Aspen of the East, and Pangkor Laut Resort in Pangkor is another internationally acclaimed resort.

“We have a global footprint on hotels and we are profitable,’’ he says.

Somehow, the visible success in most of these businesses has yet to reflect on the group’s massive property project in Sentul – Sentul East and West. Toss out all the hype and brouhaha and it would seem as if the project is not moving as fast as expected.

Yeoh puts the blame on real estate valuations, which is rather modest compared to Singapore and Hong Kong. He hopes prices will eventually appreciate but that appears a tough task for the time being

“I am waiting for KL to be a very attractive capital,’’ he says.

The true value

With wings spread across several continents and several key businesses abroad, the company could well be a Malaysian multinational. But it faces its fair share of challenges – regulatory hurdles abroad plus geo-political and currency fluctuation issues. Having staunchly adopted the blue ocean strategy, Yeoh says, competition is by no means to be feared. In fact, it is very much ingrained in the group’s DNA.

As it stands now, succession planning is very much in place for the group. The next generation of Yeohs are already learning the ropes from the seniors. In fact, for this interview Yeoh’s son Joshua was present throughout to prep himself up for similar sessions in future. “That is part of the training,’’ says Yeoh.

The circle of family business, it appears, is very much intact. For YTL Group, it is on to being driven by the third generation. But there’s no doubt that till then, Yeoh still has a lot that he wants to do first.

 
YTL :  [Stock Watch]  [News]

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