INVESTMENT HIGHLIGHT

• Construction contract review to de-rail earlier BUY thesis

• Cement division to be indirectly impacted

• Earnings trimmed 3%-13% as we now exclude Gemas-JB

• Downgrade to NEUTRAL, TP trimmed to RM1.30/share

Earlier bullish thesis de-railed. Our earlier BUY thesis on YTL was premised on a revival of its construction unit, with management targeting order book to swell to some RM12b (from circa RM400m at end-CY17) driven mainly by rail-related contracts. However, the new Pakatan Harapan (PH) Government is expected to review all mega projects in the construction sector, particularly those awarded to China based contractors. This raises uncertainties on YTL’s ability to hit its orderbook target in the near-term and derails our earlier thesis. Cement earnings is also likely to be impacted negatively from a review of the major construction contracts.

Orderbook expansion delayed or worst, cancelled. To recap, YTL’s construction order book was expected to expand significantly by end CY18F. From circa RM400m (comprising mainly internal property development projects e.g. YTL’s new Pavilion HQ), orderbook was expected expand to some RM12b by year end. Key drivers for this were: (1) The RM9.4b Gemas-JB double tracking project over the next 4 years (2) PDP role for the HSR project (3) Construction of 80%-owned Tanjung Jati coal power plant in Indonesia over the next 3 years – USD1b (RM3.8b) of the project’s USD2.7b project value comprise of construction. The Gemas-JB double tracking project was awarded to a consortium of Chinese companies comprising CRCC, CCCC and CECC in 2016.

We downgrade our FY18F/19F earnings by 3%/13% as we now exclude contribution from the Gemas-JB double tracking project. Cement earnings is also tuned down as earnings will be indirectly impacted by a potential delay or slowdown in progress of major construction projects from the expected review.

We downgrade YTL to NEUTRAL (from BUY) and lower our TP to RM1.30 (from RM1.82) following the earnings downgrade and after imputing a larger discount to our SOP-based valuation to reflect the higher earnings risk in the near-term.

Source: MIDF Research - 14 May 2018