INVESTMENT HIGHLIGHT

• Malaysia exploring proposals to reduce KL-SG HSR cost

• YTL one of winners of now deferred High Speed Rail project

• Revival a catalyst for construction; utilities still a big drag

• Maintain NEUTRAL at unchanged TP of RM1.15

Reviving KL-SG High Speed Rail? According to news reports, Prime Minister Tun Dr Mahathir Mohamed indicated that Malaysia was exploring proposals to reduce cost of the High Speed Rail (HSR) project, which could mean a potential revival of the project.

One of winners of now deferred HSR project. YTL was previously appointed as one of two Project Delivery Partners (PDP) for the now deferred KL-SG High Speed Rail (HSR) project. YTL submitted a bid for the role via a 70:30 JV with TH Properties. The other consortium appointed for the PDP role previously was MRCB-Gamuda (50:50). YTLTHP 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). Moreover, previously reported contenders for the now deferred HSR project were Gamuda, IJM and Naza’s respective consortiums.

Backed by solid track record. YTL is backed by a solid track record given involvement in the construction and operation of the RM2.4b Express Rail Link (ERL) project which was also one of the cheapest that has been rolled out nearly 2 decades ago at just RM42m/km.

Order book. YTL’s order book is estimated at ~RM8b comprising mainly the Gemas-Johor Bahru Double Tracking project which was not impacted by the PH Government’s review of infrastructure projects in the past 8 months. The construction of YTL Power’s Tanjung Jati coal power plant in Indonesia was supposed to add an estimated RM4b, but progress on the financial close of this project has been delayed, presumably given the upcoming Indonesian elections.

Potential catalyst. A potential revival of the HSR project is a catalyst for YTL’s construction division (construction currently accounts for 3% of group pretax earnings), while construction earnings has seen progressive improvement in recent quarters given progress in the Gemas-JB Double tracking project. A drag however, comes from weak Power Seraya performance given the continued overcapacity situation in Singapore power generation. Hyflux’ woes could be a blessing in disguise as it could mean the elimination of excess capacity should there be a dismantling gas supply agreements to Hyflux’ plants as part of its restructuring, if any. Other than Singapore power, there continues to be concerns surrounding the 1Bestari project, expected to expire mid-CY19, which will be re-tendered out.

Recommendation. We maintain our NEUTRAL call on YTL for the meantime at unchanged TP of RM1.15/share. Key catalysts for a review of our call: (1) Progress in Tg. Jati power plant project, (2) Improvement in Seraya earnings, and (3) Potential revival of the KL-SG HSR project.

Source: MIDF Research - 10 Apr 2019