KUALA LUMPUR: CIMB Equities Research has started coverage of YTL Corp with an Add rating and a target price of RM2, which is based on a 20% discount to realised net asset value (RNAV) and offers an upside potential of 29%.
“A group-wide privatisation exercise could act as a key catalyst for the stock, while the Express Rail Link (ERL) extension to KLIA2 and new capacity at YTL Cement (YTLC) are immediate earnings drivers,” it said on Wednesday.
CIMB Research said YTL Corp used to be a proxy for exposure to YTL Power but its earnings profile is becoming evenly balanced following the privatisation of YTL Cement.
“New earnings drivers from the ERL and its significance in YTL’s bid for the High Speed Rail project to Singapore should further spur a re-rating,” it said.
The research house said YTL is believed to have gone ex-growth because of its size and reliance on YTL Power (YTLP) for its earnings. Not only did it manage to deliver an earnings CAGR of 14.7% over FY10-13, but the contribution of YTLP to its bottomline also fell from 73% to 48% during the same period.
“Most of this was due to the privatisation of YTLC but the trend in earnings rebalancing and growth is expected to continue with 30% more capacity at YTLC kicking in and the extension of the ERL to KLIA2 expected to increase ridership levels by 36%. Both these cumulative factors are the reasons why our FY15 EPS estimate is 14% above consensus,” it said.
CIMB Research forecasts an earnings CAGR of 7.7% over the next three years, largely capped by the decommissioning of YTLP’s Malaysian power plants in FY16 if its power purchase agreement (PPA) is not renewed.
“However, we are more than confident that YTL will be able to fill this vacuum with a new stream of earnings, whether it is M&A from YTLP or winning the High Speed Rail (HSR) project with the ERL,” it said.
The research house explained the privatisation of YTLC illustrated how much value YTL can unlock with restructuring.
“If YTL repeats the same share swap exercise for its remaining listed subsidiaries – YTLP, YTL Land and YTL e-solutions – we estimate a potential FY15 EPS accretion of 8.9%, with ROEs improving from 10.9% to 12.3% and DPS almost doubling.
“YTL’s valuations are likely to significantly re-rate if all three subsidiaries are folded into one singular entity,” it said.