HWANGDBS Vickers Research, January 16, 2011
Current Price RM 1.58
Target Price RM 2.80
Time to shine
ē Biggest beneficiary of MRT given strategic landbank in Sentul, KLCC-Bukit Bintang & KL Sentral
ē Transforming into regional developer with YTL Corpís injection of prime land in KL & Singapore
ē Initiate with BUY and TP of RM2.80, based on RNAV. Potential super-cycle valuation of RM4.10.
MRT boost. YTLL has the biggest exposure to potential MRT interchanges (66% of RNAV) through its landbank in Sentul (119 acres), KLCC-Bukit Bintang (5 acres), and KL Sentral (5 acres). With potential stop(s) on the MRT Circle Line in addition to existing LRT and KTM stations, Sentul could turn into a major interchange with direct train to KLCC (just 3-4 stops away). This should significantly re-rate property values in Sentul, especially land (RM150psf vs KLCCís RM2400psf).
Size does matter. Parent company YTL Corp is in the midst of injecting prime land in KL (KLCC-Bukit Bintang, KL Sentral) and Singapore (Sentosa Cove, Westwood Apartments in Orchard Road) into YTLL for a reasonable RM476m (to be satisfied by cash and ICULS). Upon completion in 1H2011, YTL will transform into a regional player with track record in high-end residential and a bigger balance sheet. Although net gearing could increase to 1.45-1.8x from 0.2x currently, progress billings from the S$468m Sentosa Cove (substantially sold) should pare down borrowings quickly.
Attractive valuation. YTLL is trading at an attractive 43% discount to fully diluted RNAV of RM2.77 vs sector average of 28%. The successful launch of Capers high-end condos in 1Q11 at RM700psf should help re-rate Sentul, with implied land price of RM500psf. We expect Sentul land values to appreciate to RM1000psf within the next 3-5 years, driven by MRT, higher ASP and plot ratio expansion. Along with higher land prices for KLCC-Bukit Bintang and KL Sentral, this would boost YTLLís RNAV to RM4.10. We expect exponential earnings growth (3-year CAGR: 54%) on the back of a more aggressive launch pipeline & margin expansion for Sentul. There could be potential upside as we have yet to factor in contribution from YTL Corpís asset injection.
YTLL is the property development arm of conglomerate YTL Corp (60% stake). YTLL owns ~170 acres in KL City, comprising of Sentul (119 acres), KLCC-Bukit Bintang (5 acres), KL Sentral (5 acres), and Pantai Dalam (38 acres). YTLL is also the project manager for YTL Corpís Lake Fields and MidFields residential project at Sungai Besi (entitled to 10% share of GDV).
Diamond in the rough: Sentul
YTLL is the master developer of the 294-acre Sentul, which is located <5km from KLCC and next to affluent Bukit Tunku. It comprises Sentul East (108 acres, mainly commercial) and Sentul West (186 acres, residential), including Malaysiaís first private gated park (35 acres) and the KL Performing Arts Centre. Sentul won FIABCI Malaysia Property Awards for ĎBest Master Planí in 2007. The RM15b-GDV freehold mixed development is only 1/3 through, with 119 acres remaining to be developed over the next 8-10 years.
Ripe for re-rating. Sentulís land price is currently at a depressed RM150psf vs KLCCís RM2400psf (RM38psf ppr vs RM240psf ppr). We expect Sentulís land values to leapfrog by 567% to RM1000psf in 5 years (46% CAGR), on the back of:
a) Potential major interchange with stop(s) on Circle Line. Sentul is already a multi-modal interchange for LRT and KTM. With the MRT, Sentul will turn into a major interchange with direct trains to KLCC on the Circle Line. This should significantly re-rate property values in Sentul, which are currently transacting at RM500psf vs KLCCís >RM1000psf.
b) High density mixed development. As a major interchange, Sentul should benefit from higher traffic, which encourages high density mixed developments. Sentul East currently has only two commercial developments i.e. D6 and D7 which are less than 10-storeys (there are still three plots yet to be developed).
c) On-going urban renewal. Sentul has the potential to be the next KL Sentral, which is a good case study of successful urban renewal with transportation hubs. YTL Group has a strong track record in urban rejuvenation i.e. Bukit Bintang, Pantai Dalam near Bangsar, Lake Fields@ Sungai Besi, and now Sentul.
d) Plot ratio revision. Under the Revised KL Draft Structure Plan, Sentulís allowable plot ratio will be raised from 2.5x to 4x. This should increase net saleable area for Sentul West alone by 57% to 16m sf. Even at 4x, we believe Sentul has one of the lowest plot ratios in KL for high density developments. We do not discount the possibility of plot ratios being raised further (possibly to 6x) given:
(i) Sentul is among the last large contiguous parcel of undeveloped land near KLCC;
(ii) strategic location just 10-15 minutes by car or 3-4 stops by MRT (direct train on the Circle Line) to KLCC; and
(iii) urban renewal in progress.
Based on RMpsf ppr, expected growth should be a more modest 344% ie from RM38psf ppr to RM167psf ppr (5- year CAGR of 35%) Ė still a significant discount to KLCCís RM500ppr and KL Sentralís RM292psf ppr
More aggressive launch pipeline and ASP. Sentul has seen minimal launches as YTLL focused on launching its leasehold projects which are now at their tail-end. 1Q11 could see the launch of Capers @ Sentul East, priced at RM700psf - more than double the launch price of RM300psf for Saffron in 2006 (secondary market currently at RM500psf). We expect Capers to be a sell-out given the large registered interest (5000 for 466 units) and YTLís strong following.
Based on a plot ratio of 4x, ASP of RM700psf would imply a land value of RM500psf (assuming 25% pre-tax margin, gross construction cost of RM300psf) - significantly higher than the current asking price of RM150psf around Sentul.
YTLL plans to launch another three new projects thereafter at Sentul East ie D2 (commercial, 4QFY11), D5 (commercial, 2QFY12), and Fannell (residential, 4QFY12) with collective GDV of RM1.9b (including Capers).
Management is aiming for RM1000psf ASP, which should be achievable as interest builds up for potential MRT beneficiary sites (still relatively cheap compared to recent new launches in KLCC at RM1000-1350psf). At RM1000psf ASP, Sentulís implied land value works out to RM1000psf (vs KLCCís RM2400psf).
Even before MRT, underlying demand for Sentul has been strong. D6 commercial @ Sentul East launched in early- 2008, saw 90% take up within one weekend despite a 20% hike in ASP to RM450psf compared to D7 launched four months earlier. Previous residential launches ie Tamarind & Saffron at Sentul East and Maple in Sentul West in 2003-2006 were also well received.
Accelerated development. Sentulís GDV is expected to leapfrog to RM15b from RM8b previously, on the back of higher ASP (RM300psf to RM1000psf) and plot ratio expansion (2.5x to 4x). We believe MRT will help boost demand for Sentul properties and accelerate launches, hence shorten Sentulís development period to hasten RNAV realisation.
Transforming into a regional property developer
In Nov10, parent YTL Corp proposed to inject its property development assets (1322 acres in Malaysia and Singapore) into YTLL to streamline the entire YTL Group operations. The RM476m exercise will be satisfied by cash (RM223m) and issuance of new ICULS (RM253m). In order to raise cash, YTLL will undertake a 3-for-5 rights issue of ICULS at a price to be determined later. The entire exercise is expected to be completed by 1H2011. The ICULS will have a 10-year tenure, with step-up coupon rates of 3-6% and tiered conversion prices (to be set later at between 40% discount and 20% premium to 5-day VWAP). Upon full conversion, the ICULS could increase YTLLís share base by up to 70% to 1.4b shares from 0.8m shares currently.
We view the exercise positively for the following:
a) Diversify YTLLís earnings base to include prime landbank in KL and Singapore at reasonable valuations;
b) Beef up YTLLís balance sheet to take on bigger projects in future; and
c) YTL Corpís stake in YTLL may increase to as high as 69% (upon conversion of ICULS) from 60% currently.
Although net gearing may increase to 1.45-1.8x postcompletion of the entire exercise (including refinancing of S$448m advances made by YTL Corp for the acquisition of Westwood Apartments previously), progress billings from Sentosa Cove can be used to pare down borrowings fairly quickly. The S$468m or RM1.1b GDV project is already substantially sold and in advanced stage of completion (delivery by end-2011). The redevelopment of Westwood Apartments (acquired en-bloc in end-07) will have a GDV of S$728m (ASP S$3400) consisting of hotel and serviced apartments.
We have yet to factor this corporate exercise into our earnings estimates (but our fully diluted RNAV of RM2.77 has). We advise minority interest to take up the small rights issue to participate in YTLLís exciting prospects as a regional property developer with prime assets which should benefit significantly from upcoming MRT in KL. We estimate the ICULS could add another 13sen/share or 5% to YTLLís fully diluted RNAV.
Attractive valuation for exponential earnings growth
Exponential earnings growth (3-year CAGR: 54%), on the back of an aggressive launch pipeline over the next 18 months (RM2.2b GDV, mainly from Sentul) and margin expansion. With ASP doubling to RM700psf with the launch of Capers in 1Q11, Sentulís pre-tax margins could expand to ~30% (<20% previously) and possibly 40% when ASP reaches RM1000psf. Unbilled sales should surpass RM500m with Capers vs ~RM60m currently (comprising of D6 commercial at Sentul and Lake Edge Pavillion terraces completing by this year).
There could be potential upside to our earnings estimates as we have yet to factor in contribution from YTL Corpís landbank (pending completion of asset injection exercise expected by 1H11). Sentosa Cove (S$470m or RM1.1b GDV) could immediately contribute to earnings since both Sandy Island and Kasara luxury landed residential are already substantially sold and in advanced stages of construction (completing by end-2011).
Attractive valuation. YTLL is trading at an attractive 43% discount to our fully diluted RNAV of RM2.77 vs sector average of 28%. YTLLís RNAV could expand by 46% to RM4.10 over the next 3-5 years as land near potential interchanges with MRT are re-rated (assuming RM1000psf for Sentul, RM3500psf for KLCC-Bukit Bintang vs RM2400psf currently, and RM1500psf for Brickfields-KL Sentral landbank vs RM750psf currently). YTLL has the highest exposure to landbank in the key hotspots ie Sentul, KLCC-Bukit Bintang and KL Sentral, at 66% of RNAV.