Dragon Leong blog

YTL - The Growth Story

dragon328
Publish date: Wed, 06 Dec 2023, 12:13 PM
A path to hidden gems in Bursa

The Introduction

YTL [Stock code 4677] is listed on Kuala Lumpur Stock Exchange (KLSE) with a market capitalization of about RM16.5 billion. It controls several other KLSE listed companies : YTLPower [stock code 6742], MCement [stock code 3794], YTL REIT [stock code 5109].

YTL used to be one of the largest listed companies on KLSE back in 1996-1997 after its power generation business started commercial operations in 1995. The company has gone through several cycles of economic downturns, after each it has emerged stronger.

The most recent downturn due to Covid-19 pandemic in 2020-2022 has hit the group badly with numerous business operations (hotel, shopping mall, construction etc) severely disrupted. As the nation almost fully recovers from Covid-19 pandemic, YTL Group as before is becoming stronger with multiple growth engines firing up. The investment public has obviously acknowledged the strong recovery of the group and by no accident the company stock has become one of the darling stocks on Bursa with a gain of 173% YTD. YTL and YTL Power have both been included into KLCI component index stocks again from December 2023.

The Humble Start

YTL group started as a builder in 1955, building roads, army barracks and schools for Malaya which was then a young nation on the brink of independence. For more than 60 years since, the company has been shaping and supporting infrastructure that is felt by millions of people everyday. From railways to airports, power plants to water projects, hospitals to housing, the legacy of the company work underpins life and drives progress.

Its flagship construction company, Syarikat Pembenaan Yeoh Tiong Lay (SPYTL) has grown to become the first Class “A” turnkey contractor in Malaysia, from modest shop offices along Jalan Bukit Bintang. It pioneered the use of slip forming techniques in early 1980s. It has a sterling track record in construction of sophisticated infrastructure projects and plants, for example SPYTL managed to build the first YTL’s gas-fired power plant in Malaysia in just 22 months, a world record time that beat Siemens’ normal timeline of 36 months; SPYTL built ERL, the high speed rail link between KL Sentral and KLIA for just US$9 million per km, the cheapest in the world.


The First Boom

YTL as mainly a construction company in early 1990s achieved annual revenue of around RM500 million and Profit Before Tax (PBT) of around RM50-70 million a year. A big leap in fortune came when the group clinched the license to become the country’s first Independent Power Producer (IPP). After its 1,212MW Combined-cycle gas turbines (CCGT) power plants went into full commercial operations in 1995, YTL group turnover jumped to RM2.0 billion level and PBT jumped up over 10 folds to RM700 million level by 1998.

The table below summarises the company share price performance in 1989-1999:

Year

Price lowest (RM)

Price highest (RM)

EPS (sen)

PER lowest

PER highest

1989

0.15

0.46

0.9

16.7

51.4

1990

0.31

0.66

1.2

25.1

53.7

1991

0.32

0.51

2.1

15.2

24.3

1992

0.32

0.82

2.9

11.2

28.7

1993

0.68

3.49

3.4

19.9

102.4

1994

2.28

5.10

5.5

41.2

92.4

1995

3.85

6.91

21.9

17.6

31.6

1996

5.59

9.56

32.6

17.1

29.3

1997

2.56

9.00

28.1

9.1

32.1

1998

1.96

6.71

21.3

9.2

31.5

1999

3.49

7.00

20.2

17.2

34.6

*Data above is taken from Stock Performance Guide Jan 2000 edition published by Dynaquest Sdn Bhd

^share prices and EPS figures above have been adjusted for the various bonus issues and right issues

# company share base was as follows:

·         180.74 million in 1993

·         217.51 million in 1994

·         350.56 million in 1995

·         556.63 million in 1996

·         785.59 million in 1997

·         1,214.68 million in 1998-1999

We can see that if one could buy at the lowest price of RM0.15 in 1989 then sold at the highest price of RM9.56 in 1996, one could have pocketed over 60 times gain in 7 years. But in reality no one could have done that. However, if an ordinary investor who bought in at say 31-32 sen in 1990-1992, he or she would have earned over 30 times by holding onto it for 6 to 7 years. During the period, YTL increased its shareholders’ fund by over 16 times from RM235 million in 1993 to RM3,849 million in 1999.


The Next Boom

Those who got lucky to have sold off near RM9.00 in 1997 before the Asian Financial Crisis (AFC) could have bought back near RM2.00 at the bottom of the crisis or near RM3.00 in 1999 after the crisis to enjoy the next boom. Even those who did not sell off before AFC would have not lost any if they held on to 2006 when YTL market cap expanded from the lowest of RM2.38 billion (RM1.96 x 1214.68m) in 1998 by almost 5.5 folds to RM13.0 billion in 2006.

This next boom from 1999 to 2006 is the result of YTL’s aggressive overseas expansion post AFC as the crisis presented numerous attractive opportunities for M&A. YTL acquired a strategic stake of 33.4% in Electranet in 2000. Electranet was the sole electricity transmission company in South Australia with a concession of 200 years. YTL then scooped up 100% of Wessex Waters from US Enron group at a discount to Regulated Asset Base (RAB) in 2002. Two years later in 2004, YTL again made a strategic acquisition of a 20% stake in Jawa Power which ran a coal-fired power plant in Indonesia.

On domestic front, YTL took the opportunity from AFC to buy into prime real estate assets in Bukit Bintang and the prime land in Sentul. YTL immediately transformed the Bukit Bintang area into a major tourist attraction Bintang Walk, which pushed its hotel and shopping mall business to new high.

These acquisitions helped YTL to leapfrog to another level in terms of revenue and PBT as shown in the summary financials table below:

FYE June

(RM mn)

2001

2002

2003

2004

2005

2006

Revenue

2,321

2,568

4,027

4,395

4,937

5,491

PBT

722

798

840

1,159

1,257

2,240

In the second boom, if one bought YTL at about the lowest at RM2.00 in 1998 (market cap RM2.38 billion) and held on to the high of 2006 – 2007 (market cap of RM13.0 – 16.7 billion), one would have made a gain of 5.5 times in 8 years and a gain of 7 times in 9 years.

If we take a longer view, YTL has grown its market cap from the average of RM73 million (RM0.40 x 180.74m) in 1991 to a high of RM13.0 billion in 2006 (and subsequently to the peak of RM16.7 billion in 2007), that is about 178 times in 15 years! YTL PBT has increased from about RM5 million in 1991 to RM2.24 billion in 2006, that is a jump of 448 times in 15 years. TRULY AMAZING.


The Management

YTL is helmed by its Chairman, Tan Sri (Sir) Francis Yeoh. His late father, Tan Sri Yeoh Tiong Lay started the construction business. His siblings help to oversee the various business divisions, eg. Dato’ Yeoh Seok Hong at YTL Power, Datuk Seri Michael Yeoh at the cement division, Dato’ Mark Yeoh at the hotel division etc. Now the third generation is gradually joining the group at various divisions such as the construction, Yes 5G, green data centre, legal department or ESG aspect.

The YTL top management personnel are mostly hands-on with the job, with Francis Yeoh and a couple of his siblings being a civil engineer by qualification. Senior management team comprises capable professionals most of whom have been with the group for decades.

As Francis Yeoh always says, “People are the greatest asset of the YTL group.” They treat YTL staffs like a big family, often paying above average market wages. More importantly it is the YTL Value that attracts many professionals to stay with the group for decades. As the YTL company mission statement says,

“Our mission is to turn the right opportunities into the right thing, and the right thing into lasting value. We rely on the core values of ‘honesty, hard work, moral responsibility, togetherness and vitality’ to build value that is not simply lasting, but worthy of lasting.”

For the record, YTL companies have never retrenched any single employee even during the toughest times these companies have endured. The YTL bosses understood the importance of this well from the early days of construction in 1970s-1980s as one could not lay off workers when there was no construction job and then re-employ them quickly enough to complete any urgent construction job. As one former employee recalled, “The YTL big boss’ once very generous gesture truly touched my heart and I will always be indebted to him for years to come.” That is the sentiment, and hence it is not surprising to see many YTL long servicing employees in their 70s or 80s still working hard in their respective positions well beyond the normal retiring age.

Now we can see that the third generation of the Yeoh family is joining the Group as they graduate from the university. Each is holding a key position that suits their respective expertise and working diligently. For instance, Jacob, Deputy CEO of Yes, was seen busy engaging with industry players at a recent telco seminar, sharing the visions and value of YTL. Keong Hann was said to be the key driver behind the successful completion of the acquisition of Tuaspring by PowerSeraya and pushing the green data centre park to success. We can rest assured that the company is in the good hands of dedicated management who always strive to create more value for shareholders.


Sustainable Development

“BUILDING THE RIGHT THING”

YTL core values always advocate for sustainable development. This is evidenced from the design of its new headquarter office tower, Menara YTL that opened its doors in March 2020. “Satisfying modern function as well as form, Menara YTL is designed to be an energy efficient green building, which has already been awarded the Gold Design Assessment by the Green Building Index (GBI) accreditation panel.

Each floor has been designed with ergonomic comfort in mind and intelligent temperature control sensors to ensure the individual comfort of staff members. Additionally. The air-conditioning refrigerant utilizes non-CFC agents which have zero ozone depleting potential.

In line with YTL’s philosophy and commitment to sustainable development, Menara YTL provides a high ratio of open space to development footprint. Almost 50% of the site area (excluding the building footprint) is dedicated to calming greens and landscaping, which far exceeds the requirements of the local authorities.

It is now fitting that the new HQ at Menara YTL more accurately reflects our own philosophy and outlook towards innovation, dynamism and design.” [quoted from YTL Community news]

YTL Corp won gold at The Edge Malaysia ESG Awards 2023 in the utilities sector category. YTL head of sustainability Ruth Yeoh said the company reviewed its long term strategy to be aligned with ESG principles, and began its journey towards a low-carbon economy while establishing resilient communities three decades ago. “We are aware that we must not just deliver profitable growth but also remain relevant in our businesses and industries,” she says. What sets YTL Corp apart is its involvement in multiple industries, including utilities, building materials, hospitality and construction, says Ruth Yeoh, with each of these industries having its own sustainability strategy and a strong focus on reducing carbon emissions. In addition, the group sustainability division offers guidance on how to improve sustainability efforts. “Providing our business units with the freedom to chart their own journeys as they deem fit ensures the right long-term ESG goals can be set and relevant ESG concerns are addressed. All this trickles into our ultimate sustainability goal towards achieving carbon neutrality in our operations by 2050,” stresses Ruth Yeoh.

A recent example of the company’s commitment to the green economy, says Ruth Yeoh, is the YTL Green Data Centre Park, a 500MW data centre in Kulai, Johor. She says it is the first data centre campus in Malaysia to be co-powered by solar energy on-site. “The park aims to provide data storage co-location services to clients looking for more sustainable and lower-carbon solutions in Southeast Asia and serves as the foundation for achieving the group’s greater carbon neutrality aspiration,” she says.

The same aspiration applies to the cement business. “Being a leader in the building materials industry, its commitment extends beyond business to making a positive and lasting impact on the communities where it operates. In 2009, the company took a significant step forward with the launch of BUILDS, its dedicated corporate social responsibility (CSR) arm, aimed at strengthening and expanding its commitment to CSR initiatives”, YTL Cement director of communications Ong Ping Ping said, “BUILDS operates on three key pillars – community, sustainability and potential. While each pillar has its specific objectives, they are interconnected. These goals centred around ensuring and contributing to the well-being of people and the environment.”

Ong explains that YTL Cement has always coexisted harmoniously with the local community where it operates. One example is its Back to School programme where the company assisted students in preparing for the upcoming academic year by providing essential textbooks, workbooks and cash vouchers to purchase stationery and books.

Education has always been and will continue to be an important focus for YTL Cement’s CSR efforts. “Our Masterclass Series aims to enrich the learning experience of our local tertiary students. We run seminars and workshops for architecture and engineering students, where students are encouraged to work and experience with cement and concrete in their coursework. We also introduce the idea of sustainable construction to help shape the perspectives of our future practitioners,” says Ong.

Recently, YTL Cement, together with the Ministry of Higher Education, launched Malaysia’s first university-industry research consortium involving five top local universities to study tropical limestone karst landscapes in the country. The company is offering scholarships to 40 postgraduate students for research in areas like geodiversity, biodiversity, archaeology, sustainable resource management and public education. Its commitment to nurturing the country’s future talent is further reflected in the YTL Cement Scholarship programme, which started in 2007. To date, about 100 scholarships have been awarded to aspiring engineers.


The Assets

(i) SPYTL & Construction Arm

YTL Construction, SPYTL is the foundation on which YTL Group was built. SPYTL is today a full-spectrum construction group, offering services from concept and design through to building and fit out. The ERL that was built between KL City Centre to KLIA with a total journey time of 28 minutes, 112 units of boutique offices at D7 Sentul, high end condominiums at the heart of Sentul East like Fennel & Capers are among the proud projects of SPYTL. Currently SPYTL is the main local subcontractors that are heading the construction works of the nation’s biggest railway track project which is the Electrified Double Track Gemas-Johor Bahru Rail Project.

Since 1990, SPYTL has completed an order book of around RM 30 billion and is carrying out about RM2.0 billion of construction work every year. With the covid-19 pandemic largely behind us in Malaysia and no more lockdown measures to restrict construction work, the outlook for SPYTL will be bright in next few years. This construction company will see plenty of opportunities to grow its construction orderbook in the following areas:

  • Data centres and solar power farm – YTL Power is developing a 500MW data centre and solar farm in Kulai, Johor. Construction work has started on the first 72MW data centre for which Singapore SEA Group is the major client. The construction work for the Kulai green data centre park may amount to about RM15 billion when fully developed. To SPYTL, this represents a potential RM15 billion worth of construction orderbook to be achieved in next 5-7 years as this first data centre park is fully developed. YTL Power will then develop another data centre park which may bring more construction work to SPYTL. 
  • Warehouses and Logistic Centres – SPYTL is constructing warehouses, logistic centres and supporting infrastructure for Shopee, the largest online retailer in Malaysia and Southeast Asia. As online retail sales increase over time and as Shopee continues growing into new countries or regions, SPYTL will benefit from the growing infrastructure needs of Shopee. 
  • Government Infrastructure Projects – as Malaysia comes out of covid-19 pandemic, the government will likely kick start various mega infrastructure projects to spur economic growth. MRT3 tender may be awarded soon and YTL has put in the lowest bid for one of the MRT3 packages. KL-Singapore high speed rail project may get revived and potentially the high speed rail project may be extended north to Thailand from KL. SPYTL with its sterling track record will likely win some of the work packages (Note that YTL was awarded the southern portion of the KL-Singapore HSR project before it was suspended). 
  • Property projects – SPYTL carries out internal construction work for YTL Land property projects as well as for the Kwasa Damansara joint-venture property development with EPF. This JV project still has billions of ringgit of property projects to be built over the next few years.

 The construction arm of YTL achieved revenue of about RM2.0 billion in FY2021 and revenue of RM1.2 billion in FY2023. Pretax profit was RM101 million in 1HFY2021 and RM44 million in 1HFY2022. Going forward, it is reasonable to assume that YTL’s construction arm will be able to achieve pretax profits of about RM100 - 200 million every year.


(ii) Starhill Global REIT

YTL Corp owns a 37% stake in Starhill Global REIT which is listed in Singapore stock exchange. The current market capitalization of Starhill Global REIT is SGD 1.1 billion or RM3.8 billion with dividend yield of 5.5%.

Starhill Global REIT’s portfolio comprises mainly retail assets (shopping malls) which include 10 mid-to-high-end properties over 6 cities in Asia Pacific:

  • Wisma Atria, Singapore
  • Ngee Ann City, Singapore
  • The Starhill Shopping Gallery, KL
  • Lot 10 Property, KL
  • David Jones Building, Perth
  • Plaza Arcade, Perth
  • Myer Centre, Adelaide
  • Daikanyama, Japan
  • Ebisu Fort, Japan
  • China property, Chengdu

The REIT portfolio may expand if YTL chooses to inject unlisted assets into it or manages to acquire other retail assets at a bargain. With the covid-19 pandemic situation largely under control in Malaysia, Singapore and Australia, shoppers’ footfall into the above retail assets has rebounded to support continued high dividend payouts to YTL.

As I wrote, news just came in as Starhill Global REIT has renewed its current master lease with Takashimaya manager Toshin Development Singapore due to expire in June 2025 for an initial term of 12 years. Beyond its expiry on Jun 7, 2037, the master lease may be further renewed by either party for an additional six years, and for a further three years thereafter, at the option of Toshin. The current lease contributed about 23.6% of Starhill’s portfolio gross rent as at 30 Sep 2023.


(iii) YTL Hospitality REIT

YTL Corp owns a 59% stake in YTL Hospitality REIT which is listed in Bursa stock exchange. Its current market capitalization is RM1.76 billion with dividend yields of 7.1% for FY2023 June. Dividend yields are expected to jump further up to 8.8% for FY2024 June and beyond.

YTL Hospitality REIT portfolio comprises the following hotel assets:

  • JW Marriott Hotel, KL
  • The Ritz Carlton, KL – Suite Wing
  • The Ritz Carlton, KL – Hotel Wing
  • Cameron Highlands Resort
  • AC Hotel, Penang Bukit Jambu
  • AC Hotel, KL Titiwangsa
  • AC Hotel, Kuantan
  • Pangkor Laut Resort
  • Tanjong Jara Resort
  • The Majestic Hotel, KL
  • Hilton Niseko Village, Japan
  • Sydney Harbour Marriott
  • Brisbane Marriott
  • Melbourne Marriott

The 10 hotels / serviced apartment property in Malaysia and one hotel in Japan are covered under a Master Lease structure where these assets are leased back by YTL Hosp REIT to the respective vendors / lessees to operate the hotel and YTL Hosp REIT will earn recurring rental income. The 3 hotels in Australia are managed under Management Contract where YTL Hosp REIT will operate the hotels via appointed hotel managers.

With the covid-19 pandemic largely under control and Malaysia / Australia having re-opened border, visitor flows and hotel occupation is almost back to pre-pandemic level. As these hotels are all located at strategic locations, I am confident YTL Hosp REIT should be able to capture the rebounds in tourism activities in next 2 years and will be able to declare back high dividends of 8.0-9.0 sen per share from FY2024. YTL Corp shall receive a minimum of RM80 million of annual dividend payouts from YTL Hosp REIT from FY2024 and RM120 million of annual dividends when the hotel business is back to the pre-pandemic level.

On 31 Oct 2023, YTL completed the injection of The Hotel Stripes, Kuala Lumpur into YTL Hospitality REIT for RM138 million. This helps to raise cash and reduce debts at YTL. There are still several other hotels under YTL which can be injected into YTL Hospitality REIT to potentially raise cash of over RM2.3 billion:

            Potential Hotel Asset to be injected into REIT       Value * (RM mn)

                Gaya Island Resort                                                                           100

                The Gainsborough, UK                                                                   210

                The Academy Hotel, UK                                                                 110

                The Glasshouse, UK                                                                       44

                Threadneedles Hotel, UK                                                              210

                Monkey Island Estate, UK                                                              110

                Westin, Perth                                                                                 650

                The Surin, Phuket                                                                          125

                The Ritz Carlton, Koh Samui                                                         742

                Muse Hotel Saint Tropez                                                                94

                                                                                                TOTAL         2,395

* Estimates from CIMB Research


(iv) The Landbank in Malaysia

YTL owns a large landbank of prime vacant land in Kuala Lumpur:

Landbank

Status

Size (acres)

Book value (RM psf)

Book Value (RM mn)

Market Value (RM psf)

Market Value (RM mn)

Sentul Raya

Freehold

165

163

1,172

2,000

14,375

Udapakat*

Freehold

4

2,086

318

5,430

828

Stonor

Freehold

1

1,000

33

5,430

177

SKPN

leasehold

58

70

177

150

379

TOTAL

 

 

 

1,700

 

15,759

  • A portion of this land was sold to MRT at RM5,430 psf

These parcels of land under YTL Land are worth RM15.759 billion at current market value, many folds higher than the original cost of investment in late 1990s. As prime land is getting scarce in KL, I see the prospect of these land parcels doubling in value in 10-12 years to RM30 billion.

YTL disposed off a piece of land in Genting in August 2021 for RM 403 million which was over 3 times its book value. YTL also sold a portion of the Udapakat land to MRT at RM5,430 psf. YTL is prepared to monetize this KL landbank at the right price at the right time.


(v) Japan Niseko Land & Resorts

YTL Corp owns about 1,520 acres of prime land in Niseko, Japan ready for development into high end resorts home and residential projects. Niseko is home to world class ski resorts with snow quality even better than that in Switzerland and has managed to attract increasing tourists from Asia Pacific (within a 7-hour flight) in recent years.

With a land mass of around 615ha (1,520 acres) and a GDV of USD 5 billion to USD 8 billion, YTL is building on the area's natural attractions to holistically transform Niseko Village into the most sought-after ski resort in Asia over the next 10 to 15 years. It's a vision that is already unfolding.

Assuming ownership of Niseko Village in 2008, YTL Hotels has since unveiled a steady stream of upgrades, including the multi-million dollar facelift undergone by The Green Leaf Niseko Village in 2014. YTL has since developed Kasara Niseko Village Townhouse in 2015, Hinode Hills serviced apartments in 2019 and the Ritz-Carlton Reserve in 2021.

The most recent addition to YTL collection of resorts at Niseko Village is Mandala Club Niseko which opened its door in mid 2023.

It was reported that YTL acquired this Niseko landbank for USD58 million or USD0.88 psf in 2010. The market value of this land was estimated in 2022 at about USD30 psf, valuing YTL’s Niseko land at close to USD2.0 billion, a big jump of almost 35 times of YTL’s original investment cost in just 12 years. If I use linear extrapolation, YTL’s Niesko land will reach a value of USD60-75 psf or USD4.0-5.0 billion in 10-12 years.

I have in earlier article (link below) estimated that the Niseko land development would bring in operating cashflows of RM1,480 – 1,850 million a year when it is fully developed in 15-18 years. That would be no small feat, a 13 sen to 17 sen per share of cashflows to YTL every year from this Niseko land development alone.

YTL - The Journey Continues... to the Land of Rising Sun | I3investor


(vi) Malayan Cement

YTL Corp owns a 77% stake in Malayan Cement that is listed on Bursa stock exchange. Malayan Cement is now the largest cement producer in Malaysia with about 67%-70% market share. YTL Corp privatized YTL Cement in Dec 2011 by making a voluntary share swap offer at an offer price of RM4.50 per share. That valued YTL Cement at about RM3.2 billion or a PER of 10.67 times and 1.31x book value.

In May 2019, YTL Corp first through its subisidary YTL Cement made an offer to acquire a 51% stake in Lafarge Cement for RM1.6 billion (RM3.75 per share) cash from LafargeHolcim Ltd. Then YTL Corp made a mandatory take-over offer for the remaining 49% at the same valuation. Lafarge Cement then was making losses due to over-supply and weak cement prices while YTL Cement was making profits. The deal valued Lafarge Cement at RM3.19 billion or at 1.25x book value. YTL Cement also assumed debts of RM834.7 million in Lafarge Cement.

In May 2021, YTL Corp proposed to inject the domestic cement operations of YTL Cement into Malayan Cement for RM5.2 billion, to be satisfied by (i) RM2.0 billion cash, (ii) RM1.4 billion worth of MCement new shares valued at RM3.75/share, and (iii) RM1.8 billion worth of ICPS at RM3.75/share. That valued YTL Cement at a PE ratio of 14.6x FY2021F earnings and 2.9x book value. Through this injection, YTL Corp effectively relisted YTL Cement at a much higher valuation than the value it privatized it in 2011, netting in a cool RM2.0 billion cash from the exercise.

MCement reported good results in the recent Q1 FY2024 quarter with PBT of RM155 million and EBITDA of RM279 million. It is on track to achieve EBITDA of RM1.0 billion every year from FY2024. Deducted for interest costs, tax expenses and capex, MCement free cashflows should top RM700 million every year going forward. At 7% cashflow yield, MCement should be valued at RM10 billion or 1.67x NTA (about RM6.0 billion).

YTL disposed off its Dama Cement plant in China in June 2021 for RM570 million, which was at 3.6x the NTA of the cement plant. Malayan Cement has an NTA of about RM6.0 billion now and I am confident that MCement will eventually be re-rated to at least 2.0x NTA or even 3.0x NTA. For comparison, Indocement is trading at 1.7x NTA with market cap of USD2.4 billion.

Malayan Cement has total cement production capacity of over 10 million tonnes a year. At replacement cost of USD200 EV/tonne, MCement assets are worth RM12.0 billion.

Going forward, the prospects for MCement look bright with the likely rollout of mega projects such as Penang LRT, KL MRT3 and eventually KL-Singapore HSR projects. MCement has also quietly achieved 40% market share in Singapore as it owns the largest cement terminal in Singapore with a capacity of 5 million tonnes per annum. A slew of mega projects in Singapore such as Changi Terminal 5 (S$10bn), Integrated Resorts expansion (S$9bn), Tuas Mega Port (S$20bn) and MRT projects (S$57bn) to be rolled out over next few years will benefit MCement tremendously.


(vii) Electranet, Australia

YTL acquired the 33.5% stake in Electranet in December2000 for A$58.5 million (RM122.9 million based on the exchange rate then), which was its first foray offshore, building on its experience as Malaysia’s first IPP, after the AFC. In February 2022, YTL announced to dispose off its 33.5% equity interest in Electranet for A$1.03 billion (RM3.06 billion) for a gain of almost 25 times in 22 years. The disposal was strategic as interest rates were moving up which would depress valuation later. The disposal effectively put YTL Power into a net cash position, enabling it to embark on more green field development projects.


(viii) Wessex Waters

YTL bought the 100% stakes in Wessex Waters from the bankrupt Enron in 2002 at a discount to its Regulated Asset Base (RAB). Wessex Waters is one of the ten regional water utilities companies in the UK, regulated by Ofwat. It supplies water and provides water sewerage services to 2.8 million customers in South West England. It is a regulated asset with tariffs pre-determined for each 5-year period and performances regulated by Ofwat. The beauty of a regulated asset is that it never loses money over long term and its asset base will always expand along with inflation. There are 10 water utilities companies regulated by Ofwat and Wessex has been ranked top in the past 10-20 years in Ofwat’s efficiency ranking, achieving “industry leading” status in the Environment Agency’s environmental performance assessment and having the least complaints per 10,000 customers for the 9th year running to 2020. A regulated water asset company shall be entitled to some bonus tariff payments if it outperforms its peers in Ofwat efficiency ranking.

YTL acquired Wessex in 2002 for £544.6 million valuing Wessex at an enterprise value of £1,239.5 million, which was at a 16% discount to the RAB of £1,474 million then. Wessex’s Regulated Capital Value (RCV) has since increased to £2.75 billion in 2015, £3.35 billion in 2020, £4.08 billion as of 31 March 2023 and is expected to increase to £4.5 billion by the end of regulatory pricing period in March 2025. Its RCV has increased by 177% from £1,474 million in 2002 to £4,076 million in 2023.

With rising interest rates in these 2 years, Wessex is entering a rapid asset expansion phase with its RCV expected to increase by another £400 million in next 2 years to 2025. If we apply the same valuation of 1.6x RAB to Wessex as in the case of Electranet, Wessex should have an enterprise value of 1.6x 4,076 million = £6,522 million pounds (RM37.8 billion). Deducting off its net debt of £2,622 million as of 31 March 2023, the equity value of Wessex to YTL Power should be worth £3.90 billion or RM22.6 billion, which is higher than current YTL market capitalization.

Wessex submitted its 2025-2030 business plan to the regulator Ofwat on 2 October 2023. The business plan proposes to double its current level of investment to £3.5 billion and to deliver a massively ambitious set of outcomes for its customers and the environment. At the end of the regulatory period in 2030, Wessex’s RCV is expected to increase to £8.0 billion. Net debt will increase by £2.27 billion, assuming the capex is to be 65% funded by debts, to £5.1 billion. In 2030, if we continue to attach a valuation of 1.6x RCV, Wessex equity value will balloon to 1.6 x 8.0 – 5.1 = £7.7 billion or RM45 billion. Even at 1.3x RCV, Wessex should be worth £5.3 billion or RM31 billion then.

If Wessex is to spend another £3.0 billion for the next regulatory period of 2031-2035, its RCV will jump to £11.0 billion and net debt to £7.0 billion. At 1.6x RCV, Wessex will be worth £10.6 billion or RM61 billion. Even at 1.3x RCV, Wessex should be worth £7.3 billion or RM42 billion in 2035.


(ix) PowerSeraya

YTL acquired 100% stakes in PowerSeraya in 2008 for SGD3.8 billion right after the collapse of Lehman’s Brothers. PowerSeraya is the second largest power generation company in Singapore with registered capacity of 3,100MW. It operates in a competitive merchant electricity market which has an electricity pool that sets electricity wholesale price every half an hour based on supply and demand. To mitigate fluctuating electricity sales prices, PowerSeraya has its own electricity retails company, Seraya Energy, that sells short term electricity supply contracts (6 months to 3 years) to commercial, industrial and residential customers. PowerSeraya has contracts for differences (CfD) with Seraya Energy to bypass the fluctuations of pool prices. PowerSeraya then enters into forward hedging contracts on fuel oil prices and FX to lock in fixed non-fuel margin for its CfD contracts with Seraya Energy. Essentially it is a vertical integrated structure where PowerSeraya earns some fixed profit margin free of fuel price and FX risks.

Due to Singapore strong economic growth and recent heat wave, the electricity supply in Singapore has been getting very tight since 1H2023 and hence all power generating companies in Singapore are enjoying good profit margin in their retails electricity contracts. This is evidenced from the stellar results from PowerSeraya in past 3 quarters.

PowerSeraya contributed PBT of RM1.067 billion in Q4 FY2023 June and RM1.025 billion in Q1 FY2024. PowerSeraya registered net profit of S$245 million for Q1 FY2024, annualized to S$980 million. To be more conservative, I would expect PowerSeraya to make a net profit of around S$800 million on “normalized” basis for next 3 years at least to 2026 when new power generation capacity is added into the market gradually.

To get a potential valuation of PowerSeraya, I look at the current valuation of peers listed in SGX:

S$ million

Sembcorp

Keppel

PowerSeraya

Latest Quarterly Net Profit

265

445 (1H23 recurring net profit)

245

Current PER

10.33x

12.81x

11.57x

Current Market Cap

9,030

11,400

11,338

Annualizing the latest Q1 FY2024 earnings and applying the average PER of Sembcorp and Keppel, 11.57x, I get a potential valuation of S$11.338 billion for PowerSeraya.

Taking a more conservative approach, I shall assume PowerSeraya earnings to normalize to S$200 million a quarter or S$800 million a year for next few years, and apply the lower PER of 10.33x, I get a valuation of S$8.26 billion for PowerSeraya.

PowerSeraya projected operating cashflows will be over S$870 million after added back depreciation charges, a 50% dividend payout ratio will see PowerSeraya paying some S$435 million dividend a year, while reserving 50% operating cash for potential new plant-up in 2028-2030 and continued paring down of debts (currently sitting at about S$1.0 billion to be completely paid off in 4 years). At 5% dividend yield, PowerSeraya may be valued at S$8.7 billion.

In short, whether by peer comparison or potential dividend yield, PowerSeraya should comfortably get a valuation of over S$8.0 billion. A potential listing of 30% stakes in PowerSeraya would bring in good cash of S$2.4 billion or RM8.3 billion to YTL Group.

From the acquisition price of S$3.8 billion in 2008, PowerSeraya valuation has increased by ~120% to S$8.3-8.7 billion in 15 years. As PowerSeraya continues to repower and plant up new power generating capacity (it is participating in EMA’s tender for new 600MW CCGT plant-up in 2028-2030) and potentially import renewable energy into Singapore from Malaysia (as EMA intends to allow up to 4,000MW of RE import by 2035), PowerSeraya’s market share is expected to maintain/increase and its earnings base will expand in next 8-10 years.

It is reasonable to assume that PowerSeraya net profit may expand by 50% to S$1.2 billion level by 2033 based on the high electricity peak demand growth in Singapore and planned plant expansion in next 10 years. Eventually, it is not impossible for PowerSeraya to achieve a valuation of S$15.0 billion by 2033 based on current Keppel’s PER of 12.81x and PowerSeraya forecast net profit of S$1.2 billion a year then.


(x) Jordan Power

YTL co-developed the Jordan oil shale-fired power plant with Estonia national utility company Enefit. The project would burn indigenous fuel, oil shale which is abundant in Jordan and help to reduce fuel security risks and FX risks for Jordan national utility company NEPCO who had relied on imported gas for over 70% of the nation power generation needs.

Nepco has challenged the project company Attarat Power in international arbitration court on allegation that the tariffs in the Power Purchase Agreement (PPA) were too high. At the time of project development, there were lots of uncertainties around the project financeability either on power plant technology & equipment on burning oil shale at such a large scale or oil shale reserves at project site or the ability to mine oil shale at the rate required by the power plant. Not many commercial banks would lend to such a bespoke project that cost US$2.1 billion to build. Naturally such a project would require reasonably high tariffs to make it feasible and to get sufficient project financing.

As the Israel – Hamas conflict broke out, Israel has since restricted its gas supply to neighboring countries including Jordan. Nepco now needs Attarat Power’s oil shale power plant to run more than ever. We hope that this will help to have a favourable outcome from the arbitration case early next year so that YTL will be able to recognize full payments from Nepco based on the PPA terms, which would amount to about RM600 million net profit contribution a year. At 7% cashflow yield, YTL’s stake in this Jordan project is worth RM8.5 billion.

As project debts get gradually paid off over next 10-12 years, interest expenses will progressively reduce to zero and Attarat Power earnings contribution will gradually increase by another RM200 million to RM800 million a year by 2033-2035. The valuation of YTL’s stake in this project will increase to RM11 billion.


(xi) Yes 5G

YTL Power’s 5G business under Yes is gaining traction as DNB 5G network coverage exceeds 70% nationwide. With the network access fee structure and DNB equity structure sorted out earlier today, YTL Yes has been aggressively rolling out attractive 5G packages that handsomely beat the incumbent TM’s offerings, eg. Yes’ SuperFast 5G Broadband plan at RM68/month with unlimited 5G data and speed (reportedly up to 700MBps) is less than half of TM’s 300MBps package price.

For the first 6 months of 2023 to end of June, YTL Yes registered total revenue of RM438.8 million from telecommunication services and made a pretax loss of RM268 million in 1H2023, but its quarterly statements stated that this segment remained EBITDA positive. Assuming ARPU of RM36/month, I estimate that Yes had about 2 million subscribers as of June 2023.

If Yes could get additional 1.0 million 5G subscribers, and ARPU could be higher at RM60 per month (as mostly additional ones would opt for the RM68 or RM99/mth plans), it would add RM360 million revenue for a 6-month period. Minus out 20-25% for dealers’ commission and RM144 million for 6 months of DNB 5G network access fees, Yes could get additional EBITDA of RM125-145 million for 6 months and pretax loss could halve to about RM134 million.

If Yes could get an additional 2.0 million 5G subscribers, then revenue would increase by RM720 million for 6 months and EBITDA would increase by RM400 million. Yes would then turn in pretax profit of some RM130 million for 6 months or RM260 million a year. EBITDA would total RM600 million on total revenue of RM1,320 million for 6 months, implying an EBITDA margin of 45%, slightly higher than TM’s 42% (due to Yes’ slimmer overhead and lack of legacy costs as in TM). Operating cashflows after tax would top RM1.0 billion a year. At 7% cashflow yield, YTL Yes would be valued at RM14.7 billion.

In Q1 FY2024, Yes registered a pretax loss of RM71.5 million, implying that they have got almost 1.0 million 5G subscribers in the quarter since 30 June 2023 (as calculated above, pretax loss would halve to RM134 million for a 6-month period if Yes got additional 1 million 5G subscribers). If such a momentum continues, Yes would add another 1 million 5G subscribers in the current quarter and would turn around earliest in Q2 FY2024.

A few years from now, I would assume Yes to maintain about 4.0 million 5G subscribers at ARPU of RM60/month. EBITDA would then increase by about RM500 million to RM1.7 billion a year and free cashflows would top RM1.5 billion a year. Then Yes business would be valued at RM21 billion based on 7% cashflow yield, which is about the same as TM’s current market cap.

In March 2023, YTL Yes 5G alongside Nvidia brought Nvidia’s GeForce NOW cloud gaming service to Malaysia. This is a space of development worth watching for.


(xii) Green Data Centre

YTL is embarking on the largest green data centre park at Kulai with a total capacity of 500MW when fully developed. The data centres will be powered by solar power installed on-site. YTL’s venture in the green data centre park is gaining traction with the launch of the first phase for the RM1.5 billion Sea Data Centre for Sea Ltd. This 72 MW facility is expected to be completed by the 1st quarter of 2024. On 25th August 2022, Johor Menteri Besar said the Johor state government was expecting RM15 billion worth of investment in YTL Green Data Centre Park over the next 10 years. I believe this data centre business segment will start making a significant contribution to YTL earnings from FY2024.

On Sept 18, 2023, Southeast Asia’s largest telecom operator Singtel announced to sell a 20% stake in its regional data centre business to US private equity giant KKR for S$1.1 billion. The deal put the enterprise value of Singtel’s data centre business unit at S$5.5 billion. Singtel is reported to have about 120MW of data centres in the region, and developing 2 more data centres in Thailand and Indonesia, pushing total capacity to beyond 200MW. The deal effectively valued Singtel data centre business at S$28 million/MW.

A recent independent valuation on 30 September 2023 of Infratil’s investment in CDC Data Centres gave a valuation of between A$3,641 million and A$4,186 million (with a midpoint of A$3,884 million) for Infratil’s 47.99% investments in CDC. As of Sep 2023, CDC operates a total of 268MW of data centres across Australia with another 265MW of data centres under construction. This values the data centre business at A$8,093 million for total 533MW of data centres (currently operating and under construction), or A$15.2 million/MW. If just based on currently operating data centres, the value goes up to A$30.2 million/MW.

If we take the most conservative valuation of A$15.2 million/MW, YTL’s 500MW green data centre park would eventually be valued at RM22.8 billion. If we take the mean valuation of A$30 million/MW, then YTL’s 500MW green data centre would be valued at a whopping RM45 billion.


(xiii) Digital Bank

Bank Negara awarded one of the 5 new digital bank licenses to YTL – Sea Group consortium on 29 April 2022. YTL’s partner, Sea Group of Singapore is the parent company of online shopping giant Shopee. The paid-up capital required for setting up the digital bank is RM100 million in the initial phase, ramping up to RM300 million eventually.

SEA Group has its own digital bank division called SeaMoney established in 2014. SeaMoney is now a leading digital payments and financial services provider in Southeast Asia. Based on latest quarterly result announcement by SEA, its digital financial services division under SeaMoney registered revenue of US$446.2 million (+36.5% y-on-y) and adjusted EBITDA of US$165.7 million (from net loss in 2022) for the third quarter of 2023.

With SEA’s experience in running digital bank, I would expect the YTL-SEA JV in the new digital bank to be profitable in 3 years. In the longer run, I would expect this digital bank to register net profit in the region of a small commercial bank like Affin Bank (net profit ~RM500 million a year) and a non-bank lender such as Aeon Credit (net profit ~RM300+ million a year), say at around RM400 million a year. Based on typical valuation of 10x-12x PER for banks, this YTL-SEA digital bank would eventually be valued at RM4.0 – 5.0 billion.


The Investment Thesis

The investment thesis in YTL may be highlighted as below:

·         Seven-fold increase in Q1 FY2024 profit after tax (PAT) to RM940.2 million

·         Unjustifiable low forward PER of just 7.1x, compared to average PER of 18x for peers

·         Prospective dividend yield of 6.3% for FY2024 & FY2025

·         Current total asset base of RM118 billion vs current market cap of RM16.5 billion

·         Total asset base will expand to over RM200 billion in 10-12 years, making YTL one of the most valuable companies listed on Bursa

The latest strong earnings of YTL are expected to continue into next few years as PowerSeraya earnings continue to be strong beyond 2026, Wessex earnings to rebound strongly from 2024, MCement earnings to reach new high and hospitality businesses to continue flourishing.

YTL’s current valuation of 7.1x PER is unjustifiably low compared to peers below:

RM million

Tenaga

Petronas Gas

Dialog

YTL

Market Cap

58,000

33,400

11,900

16,500

FY23 Net profit

3,284

1,800

530

2,300 (FY24E)

PE Ratio

17.7x

18.6x

22.4x

7.1x

Dividend yield

4.7%

4.2%

1.6%

6.3%

The current assets if revalued fairly will be worth over RM110 billion, with the two REITs valued at RM5bn, KL landbank at RM15b, Niseko land at RM9b, MCement worth RM10b, Wessex RM15-22b, PowerSeraya over RM27b, Jordan Power RM8b, Yes RM15b and Green Data Centre 1st phase RM3b. Deducted off net debt of RM32b, YTL would be worth over RM80 billion.

The assets owned by YTL will appreciate in value over time, for instance the Niseko land will likely appreciate to US$60-75 psf and Wessex equity value will gradually appreciate to £7 billion as its RCV expands to £11 billion by 2035. In 10-15 years, YTL total asset base will likely expand to beyond RM200 billion. Then the only substantial debts will sit at the Wessex level (around £7.0 billion or RM40b), giving an equity value of close to RM160 billion for YTL, doubling up from the current asset value in 10-12 years.

Given YTL’s track records of increasing its market cap by over 30 times in 6 years from 1991 to 1997 and by 126 times in 15 years from 1991 to 2006, and most recently increasing by 200% in 18 months from May 2022 (when I first initiated Buy at RM0.52) to Nov 2023, I don’t think it is unreasonable to expect YTL current market cap to expand by 10 times to RM160 billion in 10-12 years. Hence it is not too late for those who have missed out on the latest rally from May 2022 to invest in YTL now.


For Institutional Investors

YTL is the best gem on Bursa for institutional investors as it is big, liquid and much cheaper than comparative peers. It is an ideal turnaround play as its earnings from the hospitality and construction/cement divisions rebound very strongly after the pandemic while its utility subsidiaries are in the early stages of earnings expansion.

YTL achieved an EBITDA of RM2.43 billion for Q1 FY2024, annualised to RM9.7 billion for FY2024. YTL achieved operating cashflows (before working capital changes and capex) of RM2.0 billion in Q1 FY2024, annualised to a whopping RM8.0 billion. Deduct assumed capex of RM4.0 billion a year, free cashflows may top RM4.0 billion a year for FY2024 & beyond, easily supporting a dividend payout of RM1.0 billion a year for FY2024 and FY2025. This will give a prospective dividend yield of 6.3% for FY2024 & FY2025. Beyond that, when the hospitality and cement divisions continue to post steady earnings, YTL could afford raising the dividend payouts to RM2.0 billion a year or 19 sen per share, yielding a mouth-watering 12.7%. This is entirely possible when the UK inflation cools off and Singapore peak electricity demand continues to remain strong.

In the longer run, when Niseko gets fully developed, Wessex Waters completes its massive capex programmes by 2030, MCement continues to innovate to keep costs under control, and PowerSeraya completes its expansion program by 2030, YTL’s operating cashflows will expand beyond RM10 billion a year and it may have higher dividend payouts of RM5 billion a year. At 7% cashflow yield, this could support a valuation of RM160 billion for YTL.

For the record, YTL used to pay out dividends of RM1.0 billion each in FY2015, FY2016 and FY2017. YTL listed units have paid out a total of RM28 billion of dividends thus far. I am confident that YTL will be generous in dividend payouts going forward.

For institutional investors, YTL will be a good investment stock for them to outperform the market in the short term of 1-2 years as well as in the longer run, as I would expect YTL share price to potentially double or triple up in 1-2 years and become a 7- or 10-bagger in 7-10 years. For information, a recent DCF valuation by Simply Wall St / Yahoo Finance put a fair value of RM4.60 on YTL share and said YTL was 67.2% undervalued at share price of RM1.51.

YTL Corporation Berhad (KLSE:YTL) - Stock Price, News & Analysis - Simply Wall St


For Retails Investors

For retails investors, YTL is one of the best stocks to hold for long term. It will help them to break out of the middle-income trap and to enjoy good passive income post-retirement.

As I suggested in my earlier article posted in October 2022, those who bought say 200,000 shares of YTL at the then share price of RM0.52 would be able to enjoy dividend yield of 6% p.a. based on projected dividend payout of 3.0 sen per share then.

YTL - The Journey Continues... to the Land of Rising Sun | I3investor

Now the dividend payouts will likely go up to 9.5 sen from FY2024 onwards, so the potential dividend yield would be like 18% p.a., well above any fixed deposit rates or bond yields. In the longer run, YTL dividend payouts may double up to 19 sen or more per annum, yielding 36% p.a. for those who bought at RM0.52 and 12.7% p.a. for those who buy in now at RM1.50.

For those who invest say RM100,000 in YTL now, they will be getting RM6,333 of dividends every year from FY2024, increasing to RM12,666 p.a. some 10-12 years later. Hence it will be a good passive income for those retail investors going to retire in 10-12 years’ time, and a good way to beat inflation too.

These retail investors will see their investment value appreciating gradually as the company grows as explained above. In 10-12 years’ time, each will become a millionaire by holding onto their shares in YTL. It will be a good way to break out of the middle-income trap.


The Journey Continues

“Since its inception in 1955, the YTL Group has experienced a journey of incredible transformation and growth. From a humble home-grown construction business to an integrated infrastructure developer with extensive operations that span over 10 countries, it has indeed come a long way in the past 64 years,” as YTL Land wrote to YTL Community in an article entitled “The Next Chapter in YTL’s Journey” in March 2020 as YTL moved into its new HQ, Menara YTL in Bukit Bintang.

YTL will continue to grow as helmed by its visionary Chairman, Tan Sri (Sir) Francis Yeoh and managed by a dedicated management team of professionals and second/third generation of the Yeoh family. Tan Sri (Sir) Francis Yeoh will likely continue leading the group and guarding it to new heights for decades to come, just like his late father Tan Sri Yeoh Tiong Lay who still went to office almost every day in his late 80s. As Francis walks about Lot10 at leisure time or met global top business leaders at a recent Investment Summit in London organized by UK Prime Minister Sunak and had dinner with King Charles, he always has business in mind on how to improve YTL existing business operations or expand YTL business empire.

With the dedication of the YTL team, the company earnings have rebounded many folds from a year ago and have even surpassed the pre-pandemic levels. As YTL is officially re-included into KLCI component index from December 2023 and as Tan Sri (Sir) Francis Yeoh shared his visions for the Group in the new chapter of YTL’s journey during the AGM yesterday, it is timely for me to write this note to congratulate on the great achievement of the company.

YTL has demonstrated its ability to expand market cap by over 30 times in the 1st boom (1991-1997) and again to expand market cap by 7 times in the second boom (1998 – 2007) after the AFC. I did miss out on these two rounds of upcycle of YTL, though I was lucky to have got a 5-bagger in Public Finance (bought at RM0.70 on 1st September 1998 and sold at RM3.50 in July 1999). Now after the COVID-19 pandemic, it does look like YTL is at the early stage of another upcycle. I see a good chance for history to repeat itself and YTL to grow its market cap by at least 7 times in next few years from early 2023. If all stars are aligned, YTL could potentially be a 30-bagger in next 7 years by 2030 when it celebrates its 75th anniversary. I am not going to miss it this round.

While YTL businesses have shown good rebounds after the pandemic, investors can rest assured that things will get even better in coming years as new businesses start to contribute. Having seen their investments in YTL grown by 200% YTD, investors can sit tight and fasten the seatbelt as YTL embarks on exciting journeys ahead. The dividend income from the investment in YTL will continue to grow and will be big enough for retail investors to afford a good retirement life as the dividend growth will beat any inflationary pressure.

As we investors check into whether a Niseko resort in Japan or a Marriot Hotel in Australia, we can feel to be a proud shareholder of the company who owns the hotel. As the company continues to grow and add more quality assets into its portfolio, we can just follow its footsteps and grow together in wealth as well as in our footprints overseas and our vision. So just buy a ticket, get onboard this YTL train and let the journey continue.

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12 people like this. Showing 8 of 8 comments

Income

So long.
No time to read…

2 months ago

dragon328

@Income, ya it is a bit long. If you don't have time, just read the First Boom & Second Boom then the last part.

The middle parts have been covered largely in my previous articles.

2 months ago

speakup

Yawn. Nak tidur lah

2 months ago

MrFox

a good read

2 months ago

KingKKK

Hi dragon, do you think YTL will acquire more stake in RANHILL (8x Forward PE) or other profitable water company like PBA (4x Forward PE)?

2 months ago

dragon328

@KingKKK, seriously I do not know about the game plan of YTL on Ranhill. As they have got over 20% stakes, so YTL can equity account Ranhill's profits. Whether YTL will continue raising its stakes, I do not know but going by their long term investment strategy, YTL would typically try to get a controlling stake. How would they get there, I have no idea.

As for PBA, I am not familiar with its financials so no comment.

2 months ago

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