A local research house, which has a buy call on YTL Corp with a target price of RM8, shares Yeoh's sentiment regarding construction being on the up. Noting that the company is the frontrunner for the bullet train project, in addition to possibly snagging a transport-related contract worth RM600mil in the near term, the house has identified a potential 23-fold jump in construction profit before tax to RM398mil by the 2009 financial year (FY09), from RM18mil in FY06.
The house also notes a strong chance that the group might secure an 800MW power plant in Indonesia within six months. A successful bid is expected to boost the group's total power generation capacity by 33% to 3,232MW.
Some analysts also reckon that the YTL Group is on the verge of securing water-related contracts worth some RM1bil. Though Yeoh declines to provide specifics, he says that the group is pitching for certain projects and remains confident of its prospects.
“There are projects where Wessex Water skill sets can be used very confidently. I've heard that there is a budget for cleaning up rivers and waste and such, and from our studies, we can do it so much more competitively. We're doing a project in Bintulu now, some waste treatment, so you can see we are competitive.”
Meanwhile, unsurprisingly, the analyst fraternity has wasted little time coming up with a quick estimate on the potential contributions of these new projects to the group's bottom line. One analyst estimates earnings from the bullet train to reach RM88.2mil in 2008, speeding up to RM222mil in 2009. The RM1.6bil in water and transport-related contracts that the YTL group is expected to snag should contribute RM28.2mil next year, rising to RM56.8mil in 2009.
It is also quite clear that the group will this year focus on creating value at YTL Corp level after spending years nurturing and developing various subsidiaries under its umbrella. Yeoh himself notes that the subsidiaries have been paying more dividends to shareholders. For example, he says YTL Power's average dividend yield stands at 5% to 7% whereas YTL Corp's was only at 1.4% That explains YTL Corp's share price, which has been discounted for awhile.
“I don't mind that because the original YTL Corp shareholders have already been rewarded. There's time to nurture a subsidiary and time to pay back. So last year, for the first time, our board decided to pay back the long-term shareholders. This is the next upwards revaluation of YTL Corp. It grew once from a low base and now, by paying dividends in a very big way, we are going to reward YTL Corp shareholders.
“From a 15% dividend yield, we paid 30% last year and we are thinking of increasing it even more. That's fantastic yield improvement.”
In this light, the group has proposed a restricted offer for sale of YTL Power shares on a 1-for-10 basis at only RM1 (vs market price of RM2.27) for YTL Corp shareholders and the distribution of YTL Power's treasury shares to shareholders.
It also plans to do the same with its other subsidiaries namely YTL Cement and Starhill REIT, says Yeoh. “It will be very good for our subsidiary shareholders and now for the YTL Corp shareholders.”
In a recent report, Rating Agency Malaysia Bhd (RAM) recently assigned preliminary ratings of AA1/P1 to YTL Power International Bhd's proposed RM1bil Commercial Papers/Medium-Term Notes Programme, providing some insight into the group's overseas operations.The long-term rating comes with a stable outlook.
According to the agency, the ratings are premised on some of the YTL group's key strengths. RAM says that YTL Power's main assets in power generation as well as the water and sewerage services held under UK-based Wessex Water Ltd possess strong project economics by virtue of their long-term concession agreements in stable and defensive industries.
YTL Power, via 100%-owned subsdiary YTL Power Generation Sdn Bhd, holds a 21-year take-or-pay power purchase agreement (PPA) with Tenaga Nasional Bhd, while Wessex Water owns a virtually perpetual water-and-sewerage concession in the UK.
“These regulated assets lend stability to the Group given their predictable cashflow, while the investment in Wessex Water is seen to have reduced the Group's exposure to single-country risk. YTL Power's healthy return on capital employed of 9% to 10% over the past three financial years is further testimony of its robust project economics and profitable business,” says the rating agency.
RAM points out that Wessex Water has won multiple awards, exceeding all of its key performance indicators for the last year's reporting period. It has also recorded low leakage rates and has halved the repair time for leaks reported by customers. Likewise, its power plants in Paka, Terengganu and Pasir Gudang, Johor, have consistently met the operating requirements of its PPA, qualifying for full tariff payments in the process.
YTL Power also recently acquired a stake in Australia's ElectraNet, which has a virtual monopoly in South Australia's transmission-network service business. The rating agency does, however, point out that as YTL spreads its wings overseas, it is increasingly exposed to additional operational, political, regulatory and currency risks. For example, RAM is cautious over YTL Power's Indonesian unit Jawa Power's future contributions to the group.
In addition, YTL Power's consolidated borrowings remain substantial (despite a reduction in gearing) due to Wessex Water's continuous need to partially finance its heavy capital expenditure via borrowings. Changes to the company's credit profile could also arise as a result of the ongoing PPA discussions.
If Yeoh is proven correct – as he often has in the past, at the expense of his detractors – the next three years will see the YTL group reaching even greater heights. And as he explains, the group is able to build on its past successes to secure a platform for the future.
“Today, because of our reputation, a lot of banks are actually partnering us to look for big assets. It's a merger and acquisition approach, without owning but controlling assets. Suddenly, we have a global reach like private equity players to take bigger, chunkier things,” he says.
This provides the group with ample opportunities to both return profits to shareholders and skew the ratio of return on equity considerably higher.
Yeoh uses the group's recent foray into Singapore, the fully-funded, low equity base US$100mil Sentosa Cove project, as proof that the group does not need much equity to achieve high profits.
“Where it's more global capital, the more I can take advantage of our management strengths, as we have skillsets globally. You will see our return on equity and return on asset profiles changing to become one of the better profiles in the world. We still have cash reserves of RM6bil unencumbered and in regulated assets, which means we can acquire up to RM60bil worth of assets. We've got a war chest set aside.”