NOT too late yet. We first highlighted the disparity of the share price performances between YTL Corp (RM4.32) and its key listed units in late November, noting that the holding company had been a significant laggard in the past three months. YTL Corp subsequently rose 12 sen to a high of RM4.44, but has since given up all its gains. We see this as another window of opportunity.
Less than RM150mil for the holding company? At current market prices, YTL Corp’s investments (including shares and warrants) in its listed subsidiaries are estimated to be worth RM6.12bil. Deducting this from the holding company’s own market capitalisation of RM6.26bil, investors would effectively be paying less than RM150mil for the unlisted businesses of YTL Corp, which comes with the proven leadership.
Single-digit PER for unlisted operations? Outside its listed units, YTL Corp itself is mainly involved in construction, hotel management (Ritz Carlton, JW Marriot, Pangkor Laut, Vistana etc) and property investments. It also owns a 50% stake in the Express Rail Link concession which links the KL Sentral Station to KL International Airport.
Based on our estimates, these unlisted businesses contributed average quarterly net profit of about RM10mil in the June 2003 financial year, which was maintained in the just-reported results for July-September 2003. On this basis (which excludes exceptional items), the implied valuation of the unlisted operations works out to less than 4x PER! Earnings aside, YTL Corp on its own is asset-rich, counting among its property holdings the Lot 10 and Star Hill Shopping Centre, as well as the JW Marriot Hotel, which are all located in the heart of Kuala Lumpur.
A case of catching up. While we have not been keen on YTL Corp in the past, this was purely on valuation grounds. At its premium valuation previously, there was every reason to bypass the holding company for cheaper and direct exposure to its listed units which are also the major contributors to group earnings. The case is different now as the listed subsidiaries have been substantially re-rated at the expense of the holding company, while the unlisted businesses have shown improved profitability. At under 4x underlying PER for the unlisted operations, we see scope for a re-rating of YTL Corp’s share price.
Discount to revalued assets. This is more so considering that YTL Corp has reversed from its previous premium to revalued asset to about 12% discount currently. This is based on revalued asset of RM4.90 per share, valuing its listed subsidiaries at prevailing prices.
There is also considerable revaluation potential associated with its three prime properties in KL, i.e. Lot 10, Starhill and JW Marriot Hotel, which were acquired at distressed prices at the height of the Asian financial crisis.
A question of relativity?At the end of the day, the wisdom of investing directly in the listed units is still not wrong but relative valuation should also not be ignored. At current prices, we believe the valuation gap between YTL Corp and its listed subsidiaries is compelling enough to take a position in the holding company, especially for the more trading-oriented investors.
If you are already a shareholder of YTL Cement (RM5.10) and YTL Land (RM2.37) as per our recommendations, we would urge that you hold on to these two stocks which remain on our Buy list.
However, if you are fresh to the group and have a trading streak, do take a closer look at YTL Corp, for which we have a Trading Buy call. Besides relative valuation, we also note support from fairly consistent share buybacks by the company.
Meanwhile, we are rather neutral between the alternative investments in YTL-WA (RM1.63) and YTL-WB (RM0.845). While YTL-WA is valued cheaper at 6% conversion premium versus 25% for YTL-WB, the trade-off is its shorter expiry (September 2007 against June 2009) and lower warrant gearing.
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