We downgrade our rating on YTL Corp (YTL) from HOLD to SELL, as we lower our RNAV-based TP from RM1.05 to RM0.90 to reflect the lacklustre outlook for both the cement and construction sectors. Despite forecasting a strong earnings recovery in FY19E, this is merely due to a low base effect, as earnings will still be down by 30% from FY17 on our estimates. We believe that YTL’s share-price performance is likely to remain subdued due to a lack of catalysts.

Overcapacity to Cap Recovery in Cement Segment

We believe that the operating environment for the cement segment will remain challenging and expect its profit margin to narrow further, due to rising operating costs. As the industry overcapacity situation remains unchanged, stiff pricing competition among the cement manufacturers is still ongoing, as they continue to compete for market share. Although YTL has a cost advantage against its peers, it is still challenging for YTL to grow its profit for the segment, and the segment’s profit contribution is still on a declining trend since 4 years ago. Its PBT contribution has declined by more than two-thirds from RM664m in FY14 to less than RM200m in FY18.

Uncertainty Lingering Within the Construction Sector

Although the government cancelled, delayed and renegotiated multiple big infrastructure projects, the RM8.9bn Gemas-JB Electrified Double Tracking (EDT), on which YTL is one of the two main sub-contractors, remains intact. However, the KL-Singapore HSR project, on which YTL was bidding, has now officially been put on hold. We believe that as the current government focuses on reducing the financial burden of the country, there is still the possibility that EDT could be reviewed. Any large-scale infrastructure projects are only likely to be available for tendering by 2H19.

Downgrade to SELL With Lower TP of RM0.90

We downgrade our call to SELL from HOLD, as we lower our sum-of-theparts-based TP to RM0.90, on the back of 6.5%-18.5% EPS cuts after lowering the expected contribution from both the cement and construction operations. Upside risks to our call lie in major contract wins and a stronger-than-expected recovery for cement demand.

Source: Affin Hwang Research - 25 Oct 2018