YTL Corp’s dividend story sustainable


  • Business
  • Thursday, 11 Feb 2016

Tenaga Nasional Bhd says the 21-year power purchase agreement with YTL Power Generation Sdn Bhd has expired on Sept 30, 2015.

PETALING JAYA: Despite higher capital expenditure (capex) over the next few years, YTL Corp Bhd should be able to sustain its dividend payout of at least RM1bil, which is an over 80% payout ratio, says CIMB Research.

The research house said YTL’s management stressed that even with the additional capex for PT Tanjung Jati Power, the diversified group has stable cashflows from subsidiaries which can support a dividend yield of over 6%.

“YTL has largely achieved its optimal group structure, which should enable it to extract about RM1bil per year from its subsidiaries in order to pay handsome dividends.

“YTL’s over 80% dividend payout ratio in financial year 2015 translates to a 9.5-sen single-tier dividend per share, or over a 6% dividend yield. Indications are that this renewed level of dividend payout can be sustained,” said CIMB Research, which had recently hosted a two-day non-deal roadshow for YTL in Singapore where the management met 10 buy-side houses.

CIMB Research said the 6% yield is the highest within its construction universe and thanks to the support of cement and utilities, it is expected to be wholly funded by the group’s internal operations, not affecting its consolidated cash of RM16bil.

The research firm added that 50%-owned Express Rail Link Sdn Bhd (ERL), which had raised its fares from January, could prove to be a surprise contributor to the group’s dividend comeback story.

According to the report, YTL’s strong dividend outlook is backed by subsidiaries such as YTL Cement Bhd and YTL Power International Bhd, which contribute 31% and 38%, respectively, to dividends.

The firm noted that YTL Cement has healthy margins, as it continues to be the least vulnerable to the price war in the cement industry, while YTL Power is backed by stable earnings from Wessex Water Services Ltd, its wholly owned water and sewerage operator in the United Kingdom.

The real estate investment trust segment contributes 17% to dividends, while the remaining 14% is sourced from the group’s other divisions.

Elsewhere, the RM4.3bil order book to build the Tanjung Jati power plant, targeted for early completion in 2020, is poised to make YTL Power’s earnings stream robust over the long term.

Recall that in late-2015, YTL’s 53%-owned subsidiary YTL Power had won a US$2.7bil (RM11.4bil) contract to develop the 1,320MW Tanjung Jati coal-fired power plant in Cirebon, West Java, Indonesia.

CIMB Research said that this greenfield venture was not only positive to YTL Power in terms of securing its second power plant in Indonesia, but was also directly positive for YTL, which will undertake the engineering, procurement and construction or EPC works valued at RM4.3bil, while YTL Cement will supply the cement.

“Based on an assumed 10% pretax margin, we estimate an annual pre-tax profit contribution of RM108mil, or 7%-8% of the financial year 2017-2018 bottom line, and 5%-6% of the total revalued net asset value,” said the report.

Meanwhile, as to the high-speed railway (HSR) linking Kuala Lumpur to Singapore which is set to make a comeback in the second half of 2016, the report noted that YTL remained committed to its HSR proposal despite recent news pointing to the possible participation of Chinese contractors to fund the project.

“The group believes that its HSR proposal is still competitive, as it leverages on its track record in building and managing the ERL.

“At this juncture, we believe an international open tender can still work to YTL’s advantage,” the report said on concerns that YTL could be out of the HSR game.

In 2006, YTL had put in an RM8bil proposal to build a single-line HSR from Kuala Lumpur to Singapore. CIMB Research estimates that based on today’s prices and current specifications, it could build the HSR at a revised cost of RM16bil-RM20bil, which is “still substantially lower than the most recent proposal from a Chinese contractor, at a reported cost of RM70bil”.

The research firm said there was still a good chance that the HSR project takes up an open tender structure, given the planned international open tender schedule from the fourth quarter of this year as highlighted by the Land Public Transport Commission.

YTL’s shares closed one sen lower to RM1.52 for a market capitalisation of RM16.55bil, while YTL Power was down two sen to RM1.42 for a market cap of RM11.66bil.

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