Big rail catalyst around the corner for YTL Corp

KUALA LUMPUR: CIMB Equities Research expects a big rail catalyst for YTL Corporation Bhd on news that the company had secured a package from the RM8.9bil Gemas-Johor Bahru electrified double-tracking railway project.

The research house said on Thursday Nikkei Markets reported that YTL Corp managing director Tan Sri Yeoh Sock Ping said at the group’s AGM the company had secured part of the project.

It was reported that Yeoh also reiterated YTL’s intention to participate in a tender for the KL-Singapore high-speed rail (HSR). However, its consortium members (local or foreign) were not disclosed. It is unclear whether it will tender for the project delivery partner (PDP) or the AssetsCo package. 

To recap, the 191km Gemas-Johor Bahru project covers the southern region from Negeri Sembilan to Johor. This rail double-tracking is an extension of the RM12.5bil, 329km Ipoh-Padang Besar northern double-tracking project that was completed in 2012. 

CIMB Research said the project uses the engineering, procurement, construction and commissioning (EPCC) model.

The China Railway Construction Co.-China Railway Engineering Co.-China Communications Construction Co (CRCC-CREC-CCCC) Consortium is the main contractor. 

“We expect two to three subcontract packages to be awarded to local players over the next three to six months (1H18). Construction could commence in 2H18.

“We estimate YTL’s construction order book was valued at RM500mil at end-1QFY6/18, with most of the works in hand being in-house property development jobs. 

“Assuming that YTL secures 40%-70% of the Gemas-JB rail job, its order book will be boosted significantly by seven times to 12 times to between RM4.1bil and RM6.7bil, equivalent to 7.1 times to 11.8 times of its FY6/17 construction revenue.  

If YTL secures 40%-70% of the total RM8.9bil contract value, a four-year construction period and 7%-8% sub-contracting net margins, we estimate that the Gemas-JB rail contract will enhance FY19F EPS by 6%-14% and FY20F EPS by 5%-12%. 

“Factoring that into our RNAV will raise our target price by 3%-5% to RM1.53 to RM1.55/share (unchanged 20% RNAV discount).    

“Retain Add due to improved visibility for rail order replenishments, its potential participation in KL-Singapore HSR and the Gemas-JB rail projects. 

“We believe the worst is over for its share price. Its target price of RM1.48 remains pegged to a 20% RNAV discount. This is supported by its sustainable dividend yields of 6%-8%. New potential catalysts are major contract wins. Downside risks are job delays,” it said.