INVESTMENT HIGHLIGHT

• Appointed PDP role for Southern portion of HSR

• Massive orderbook expansion by year end

• Cement division a spillover beneficiary

• Re-affirm BUY at unchanged TP of RM1.82

Appointed PDP for HSR. YTL Corp has been appointed as one of two Project Delivery Partners (PDP) for the KL-SG High Speed Rail (HSR) project. YTL Corp had submitted a bid for the role via a 70:30 JV with TH Properties. The other consortium appointed for the PDP role was MRCB-Gamuda (50:50). YTL-THP was selected for the Southern portion of the alignment (Johor portion) and MRCB-Gamuda for the Northern portion (KL to state border of Melaka-Johor).

MRT3 as a yardstick. Using the MRT3 as a yardstick, we think PDP fees could range between 5% to 6% of the civil works portion of the HSR. This was estimated at RM30-RM45b based on recent reports, though exact breakdown between Northern and Southern portion is not yet forthcoming. Also, the value will depend on the robustness of work required for the Northern portion vs Southern portion e.g. underground works are typically a lot more expensive (up to 5 times) compared to onground works.

Range of estimates. Based on 5% to 6% PDP fee assumption, RM30b-RM45b civil works portion and a range of estimates for the Southern portion of the alignment, we estimate a min-max orderbook expansion of RM600m – RM1.5b for YTL (See Exhibit 1). This is 5%-13% of YTL’s targeted construction orderbook of RM12b (by year end). However, recognition is likely to be spread over quite a number of years as the HSR is only targeted to be up and running by end 2026.

Massive orderbook expansion. YTL’s construction earnings were still depressed in 2QFY18, but we expect gradual improvement in 3QFY18 before a step-up from 4QFY18 from commencement of key projects. YTL is targeting orderbook to expand from RM400m currently to some RM12b by year end. Key catalysts are: (1) Gemas-JB double tracking project with a total project value of RM8.9b (2) YTL Power’s RM11b 1320MW Tanjung Jati power plant (commercial operation date target in 2021) which entails an estimated construction value of RM4b.

Spillover impact on cement? Towards end FY18F and into FY19F, YTL’s cement division should benefit from the implementation of a slew of rail contracts i.e. Gemas-JB, ECRL, HSR on top of YTL Power’s Tanjung Jati power plant construction which will see clinker supplies from its plant in Malaysia.

Recommendation. Re-affirm BUY on YTL at unchanged SOP-derived TP of RM1.82 with potential upside once more concrete details on HSR contract values emerge. This development underpins our thesis of a revival in YTL’s long overlooked construction unit. Key catalysts: (1) RM8.9b Gemas-JB project award (2) Financial close for YTL Power’s RM11b Tg. Jati power plant (3) Rollout of HSR contracts (4) Organic and non-organic improvement in cement division revenues (4) Possible consolidation in cement sector.

Source: MIDF Research - 6 Apr 2018