Investment Highlights

• Gemas-JB double-track project win a strong catalyst

• Meaningful earnings impact to revive YTL’s long overlooked construction unit

• Stock already trading at close to 12-month low

• Re-affirm BUY at unchanged SOP-based TP of RM1.40/share, 4% dividend yields attractive

Gemas double-tracking win. Recent news reports indicate that YTL is one of the key winners of the Gemas-Johor Bahru work packages. As a recap, the Gemas-Johor Bahru double tracking project is estimated to be worth RM8.6b involving 197km of doubletracks, stations, electric trains, depots, land viaduct, bridges, electrification and signalling systems. The project was delayed due to several issues including land acquisition and relocation exercises.

More than quadraples YTL’s order book. Even if YTL scores just 50% of the work packages (or RM4.3b), the impact on its construction revenue and profit could be substantial. YTL’s construction revenue and earnings has been pretty dismal in the past few years i.e. RM112m/RM145m revenues over FY16/17 and RM13m/RM57m pretax profits. The Gemas-JB project win could easily more than quadruple YTL’s current order book of RM1b (comprising mostly internal jobs).

Meaningful impact to bottomline. Assuming a 4-5 year construction period and assuming YTL secures 50% of the total project value, incremental construction revenue could average around RM1b/annum while PAT (assuming a typical 9% profit margin for rail-related jobs and a 4-year construction period) could be enhanced by around RM90m/annum, a quantum leap versus what the construction unit is generating now. At the group level, the impact on PAT could be between 8%-10%; construction earnings contribution to group could increase from 3% currently to 8%. This is assuming no third party takes up a stake in the job.

Cement an indirect beneficiary. YTL Cement is an indirect beneficiary from supplies to the project. We estimate cement annual revenue could be enhanced by up to 4%/annum assuming major supplies to the project come from YTL Cement.

Source: MIDF Research - 14 Dec 2017