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On the fast track

   
YTL MD Francis Yeoh reveals how the group plans to get its groove back this year

The Star Online, 20 January 2006

COVER FEATURE
and HARI RAJ

Slow and steady YTL Group is poised to make waves this year

“I NEED my sugar rush,” laughs Tan Sri Francis Yeoh, easing back into his leather sofa. The second-generation scion, who sits atop a family-controlled business empire, is visibly, but rather uncharacteristically, bushed almost two hours into the interview. 

In that span of time, Yeoh has covered the history, path forward and business model of almost all of the six listed companies under the YTL Group's stable, his thoughts on the economy, the sweet spots in markets he wishes to tap further, globalisation and Malaysia's competitiveness.  

Truth is, very few in corporate Malaysia personify such entrepreneurial leadership as dramatically as Yeoh after taking over the reins of the group two decades ago. He has since nurtured it from a single listed old-line industrial entity to a force comprising six listed entities with a combined market muscle of over RM27bil in Malaysia, and with a span of assets assembled in mature spots around the globe, serving some 10 million customers with a staff force of over 6,000.  

Yes, YTL Corp Bhd is that rarest of beasts – a steady company, free of outstanding legacy issues and rude shocks (traits which investors most loathe) with a crystal clear business formula that has not been tampered with in years, not least because it has worked.  

In some ways, one can say that analysts' biggest grouse about the group is that it's fairly predictable. Not a bad path to follow for its brethren on Bursa Malaysia that are grappling with much bigger and fundamental issues.  

As one observer aptly puts it, the YTL group has every part of its plan in place. However, on a bourse characterised by speculative activity, the group's staid navigation through waters both local and international has led to perception that it is – whisper it – not the most exciting of stocks on which to have a punt.  

The current occupant of the managing director's chair is a self-avowed patron of the arts, an interest that has seen a steady stream of artistes and cultural icons making their way to these shores. It's the one showy aspect of a company that is more than happy to take things slow and steady.  

Not helping that perception is the fact that, by Yeoh's own admission, 2006 was a rather quiet year for the group. Still, as he ushers BizWeek into his office for an exclusive interview, he enthuses that the group is primed to make waves as the calendar turns over to a new year – and he plans to amply reward shareholders who have stayed the course.  

Taking on the bullet  

The timing of the interview is impeccable. The year started with investors flocking into the shares and warrants of YTL Corp, a trend that actually started towards the end of 2006. YTL is slowly transforming from a steady dividend paymaster with healthy cash flow from its regulated assets to one that is likely to see a significant pick up in its construction business – a mantra that is increasingly becoming more audible as the Ninth Malaysia Plan rolls out its list of goody projects for the long-languishing sector.  

In the spotlight is YTL Group's proposed US$3bil bullet train project linking Kuala Lumpur to Singapore that may soon become a reality. In an interview with Reuters over the week, Transport Minister Datuk Seri Chan Kong Choy said: “We are for it”, after a study showed that the project is feasible. A day later, Singapore's Transport Minister Raymond Lim was quoted to have said that Singapore is open to the proposal for the high-speed rail link and that it was looking forward to receiving the pitch.  

But Yeoh reveals that the bullet train project proposal is not new: “We are actually proposing some projects that had been postponed before. The proposal for the bullet train was originally given during (former Prime Minister) Tun Dr Mahathir Mohamad's time. I remember he quite liked it, but there were other complexities.” 

What's imperative, he says, is that if the project is to take off, it should do so as soon as possible. As he points out, 70% of the cost for similar projects in Europe arises from the need to use complex civil engineering to avoid developed areas. 

“If we don't do it quickly, then one day it will be impossible. The technology cost is not very high, so I can still make it work. Our land is still very inexpensive compared with Europe or America, and we are not so chock-a-block developed in the corridor that we have to acquire land from houses or dig tunnels.”  

By Yeoh's rationale, attempting the project at a later date will lead to inflated costs, far above the US$3bil that the link between KL and Singapore is expected to cost. It's worth noting that Taiwan's recently-completed bullet train between Taipei and Kaohsiung, for a journey lasting the same duration, will cost US$15bil.  

Yeoh points out that the project will have great repercussions for the corridor it creates, a line that connects Seremban, Malacca and Johor with two of South-East Asia's most prominent metropolises.  

“Like our ERL, we will have one express and one commuter so that we will always have two lines. It's a bit more expensive but it's important to help develop corridors indirectly. This will also help the Southern Johor corridor in a very massive way,” he says.  

“Every infrastructure project that has built a corridor has seen that corridor prosper, so there is no need to guess the impact. The transformation and the effect are massive, for real estate as well. Look at the matrix – Malaysian expatriates will of course want to buy homes here, earn Singaporean wages but have Malaysian costs and quality of living. It's very positive for Malaysia.”  

But what of the train's commercial feasibility? Will the impending ease on restrictions for air travel that will see discount carrier Air Asia Bhd and Singapore's Tiger Airways Pte fly the KL-Singapore route dilute the project's potential passenger traffic? 

“Well, it's time saving, and environmentally friendly.” says Yeoh. “You save on carbon emissions. People will travel how they want to travel. It's about providing alternatives. Some people like trains, some people don't.  

“I think the KLIA ERL was a much harder project, and look at the success and uptake of that. At the end of the day, it is really nice to know you can go to Singapore in one and a half hours in the same day. It's a comfortable thought.” 

But that's as far as Yeoh is willing to go on the issue of the bullet train project. He quite clearly prefers to let it take its own course and wait for the Government to make a clear decision.  

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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. 

Payback time  

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.”

YTL abroad  

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. 

Looking forward 

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.”


 


 


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