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A time-honoured formula

Francis Yeoh: It's really nice to know that you can go to Singapore in one and a half hours. It's a comfortable thought.

The Star Online, January 20, 2007

ALTHOUGH he has transformed Bukit Bintang into one of Kuala Lumpur's most upscale areas, Tan Sri Francis Yeoh's penthouse office overlooking the now-bustling street hasn't altered much in years. The leather sofa's mahogany accent exudes warm ambience, lamps illuminate every nook, and a sturdy desk is laden with thick journals of every description. As they say, there is much comfort in the old and familiar.?

In a way, it embodies the strategy of YTL Group, one that some analysts describe as dull but others praise for its unwavering ability to hold steadfastly to a single recipe that has stood the test of time and many crises – the insatiable thirst for regulated, long-term concession assets. Yes, that which by now appears to be an old but familiar line for the group.?

“That will continue to be our predominant model,” says Yeoh. ?

If Yeoh has his way, that's a business model that the group will continue to court in perpetuity. But who knows? Three years, he says, for some, is an eternity. What more, perpetuity.?

Below, excerpts of the interview with YTL Group's chief steward: ?

BizWeek: It appears that 2006 was a relatively quiet year for the group in terms of news flow and new contracts. On the other hand, the group seems to be picking up steam this year... ?

Much earlier, I had forecast that 2006 would be a quiet year generally and more specifically for the construction business. However, it didn’t turn out as bad as I predicted. I expected it to be a lot more challenging. The fact of the matter is that our economy has been on steroids for a long time, largely due to the booming construction sector and the feel-good factor that came from the multiplier effect of construction spending. So, with rising oil prices and everything, people in the city were not feeling good. When people see cranes and activity in construction sites, there is a trickle down effect. We've been growing so much in construction sector and then suddenly, there was none for three years, which is an eternity for construction sector. ?

But there's nothing wrong with managing the economy with a balanced budget. Fundamentally, we're doing well. If we were doing that badly, then the ringgit would have gone south, not north. ?

So you're upbeat about 2007 onwards? ?

The next three years are going to be robust years for the Malaysian economy. We're going to see spending of as much as RM200bil (under the Ninth Malaysia Plan) and PFI (private finance initiative) of RM20bil. That is beginning to trickle down. Already the news flow has caused some optimism. Some corporations have got contracts including ours. When we start work and the money flows down to the economy, people will feel really good and I expect that to show in December this year or from as early as July. ?

Spending will go on for three years. I'm a brave guy to predict three years, as normally, even three months would be hard to predict. I see 2007 to 2009 as being very good for YTL. ?

How has the strengthening ringgit impacted your businesses, which derives a chunk of its earnings from overseas operations? ?

Our ringgit and pound revenues are well hedged, so it will be neutral. In fact, we gain from the fact that our assets, in terms of US dollars, are now worth more. Our cement and power plant assets in terms of US dollars have appreciated indirectly from a global asset perspective. Our hedging policy is that when revenue is in pounds, we will borrow in pounds. ?

There has been talk that you may privatise YTL Power. How far is this true? ?

There is no need. You want to privatise YTL Power because you want to take the money. I think the regulated asset in Wessex is a concession in perpetuity, and I'm not going to ever sell it in perpetuity. Our Australian asset (ElectraNet Pty Ltd) has a concession for 200 years. That's how I get the cash flow to huge dividend payouts to YTL Corp shareholders. I want to have more of these (long term) assets.??

But would that necessarily mean keeping the entity, in this instance YTL Power, listed???

Like Warren Buffet, YTL Corp has a track record of 55% compounded growth since 1986. Since its listing in 1986, we've paid dividends every single year. The returns are very good. ?

We nurture our subsidiaries such as YTL Cement, YTL Land and YTL Power in the same way as Warren Buffet did with his investments in Coca-Cola, which grew to become huge. Our subsidiaries are like mini Coca-Colas – our strong jewels – that can grow to become bigger and bigger. ?

The subsidiaries were paying more dividend and cash to shareholders. For example, YTL Power's average dividend yield stands at 5% to 7% whereas YTL Corp was only at 1.4% . That's why YTL Corp's (share price) was 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.??


How consistent is this dividend policy?  

Over the next 25 years, it's not a problem as concessions are very long. Earlier, you asked about privatisation. Now, we have a renounceable offer for sale system where we give YTL Corp shareholders shares of its subsidiary YTL Power (one YTL Power share for every 10 YTL Corp shares) at an offer price of RM1 – a discount compared to current market price of RM2.24. 

That means YTL Corp shareholders are getting an RM1.24 dividend. This is the first time we're doing that. Also, the subsidiary gets dividend in specie and that means a compounded multiplier effect. We're starting with YTL Power and we're going to do the same thing for YTL Corp's other subsidiaries namely YTL Cement and Starhill REIT. 

It works for YTL Corp as well because our price of accumulating our subsidiaries' assets is very low. Our cost of owning YTL Power is very low. Even at RM1, we make profit of RM40mil. We're not giving a free bonus but giving dividend cash flow to YTL Corp again.  

You can call this a mini-privatisation of a subsidiary shares to the shareholders of the parent company who have been very patient in a long time.  

For short-term investors, they would not like YTL Corp compared to YTL Power because the latter's yield is better. Before, investors had to decide whether to buy YTL Cement, YTL Power or YTL Corp. Now, they have to buy all three, so the yield of YTL Corp rises and will be substantially more than its subsidiaries.  

In our subsidiaries, our dividend in specie is very efficient. If you add up the shares that we buy back and give out, it actually is a very stable dividend, cash dividend plus a stock dividend. We have been very consistent, so the international investors looking at us will realise the power of this instrument and the consistency of this dividend. 

It will be very good for our subsidiary shareholders and now for the YTL Corp shareholders, as all three subsidiaries (YTL Cement, YTL Power and YTL Land) are attractive, all are paying powerful dividends, above 5% to 7%. Look at our (Starhill) REITs, we give 8% in five years, and we pay dividends twice a year, but our market does not understand the instrument. People love gambling. 

In other words, you've tried to bridge the gap of appeal between the parent and its subsidiaries?  

That's right. That's my model. That is why I don't want to sell. If I sell and privatise YTL Power, once I get the billions, do I want to pay it out as dividends? And could I do it the following year? 

It's better to keep a long-term dividend policy that has a yield two or three times higher than the average global market stock's yield. Everything else will take care of itself. The cash dividend market investors will understand. I can do the same with YTL Cement and Starhill REIT – these are all cash-carrying instruments.  

It's a simple formula to reward long-term shareholders of YTL Corp. And we can do that because the nature of all our projects is very long term. Otherwise, I would not be able to do this. This is not a one-off thing. It's due to good management. 

How do you define good management?

Other than winning all the awards...(smiles). Well, at the end of the day, when we took over Wessex Water, it was a top-10 company in Britain. After two years under our ownership, it became number one. Our management is fantastic. We can value-add a lot. Our skill sets are incredible. From day one, we could build power plants at a more competitive cost (40% lower) than our peers and in a shorter time. We did it in 22 months when the average was 36 months.  

The difference is that we leave a lot of meat and goodies to concession owners, which are YTL shareholders. A lot of people like to take concession profits up front by listing it and leaving very little meat behind. That's quite irresponsible. If you do not cream from the concession profit, you can leave a lot of meat and that's how you can pay dividends like this and each year, as the debt comes down, you get to pay more dividends to shareholders.  

It's actually a very simple, uncomplicated formula. I've been criticised that it's quite boring. Short-termism or myopia is a way of life. That's the way the world works. I've been doing 55% compounded growth but nobody cares or pays a premium for that, so I have to do this cash dividend to make people notice. This is another way to re-rate the stock rather than keep on floating companies. How many more AGMs can I attend?  

The value is there. There's no need to float, for example, Wessex Water. Just give me my premium and my management premium.

What do you think of the investment climate in Malaysia?  

I think we are over-regulated to a certain extent. Our tax regime at 26% is still higher than Hong Kong and Singapore, so the stocks look expensive just on that corporate tax PE basis alone. Then they come up with the new accounting IFRS rules. That shaves off about RM500mil of my profits because of the accounting, so I have RM500mil unencumbered cash flow but I cannot report it as profit.  

It has to be what it has to be, but we're making our market look pricey when it's not. We should be as competitive as others. Our business model is quite fine but these issues need to be addressed. Otherwise, we run the risk of being a pricey market for the wrong reasons, especially when earnings profile and cash flow is in fact better than many of our regional competitors. Why should we suffer more?


So, the modus operandi would be to continue to focus on regulated assets?

We will continue to add capacity, as our margins are high. We don’t want to overpay for pricey assets. We always buy assets at the right price so we can dividend out. That continues to be our predominant model – using our core competency of construction to build efficiently, combined with good management.

Which markets are you currently looking at?

Inevitably, regulated assets are from countries that respect the law and sanctity of legal contracts, namely Australia, Singapore, Dubai – all these little enclaves, international crème de la crème centres with financial elements are easy territory for us. Banks are there, they know us – it s very easy to go to those territories.

What about the Middle East, the current flavour of the month?

Yes, we are looking at the Middle East but in a different way – only at Dubai and Abu Dhabi. I'm going to markets that are transparent, have low tax regimes and are friendly. It's a no-brainer to focus on territories that welcome us with transparent rules of law. We won't waste our time and resources going into difficult territories.

Why Indonesia?

Indonesia is a bigger Malaysia as far as I'm concerned. We invest in regulated assets – my grandfather came here and adopted Malaysia and we stayed here forever. There have been many problems in this country, politically and economically through the various cycles, but we stayed and built up the company. We look at Indonesia the same way. We adopted the country and we're going to stay there forever.  

The Indonesian market is 10 times the size of Malaysia. It's quite the same matrix, and we're used to Indonesian workers working for us here in construction and so on, so there is not much basic difference. Geographically, part of Indonesia is closer to us than Sabah and Sarawak, and from cement to power we are already there.  

Likewise, we've adopted Britain. We are going to invest there forever and we are not going to sell that. We're doing the same in Australia. Wherever we are, once we are there, our management and our office will be there. But we have problems when things are not transparent, and politically it's very difficult in a corrupted country it's very difficult for us, if you have to go through a corruption curve and all that wastes too much time.

Do you think projects should be awarded on an open tender basis?

As far as I'm concerned, if a project is important for the economy and country's infrastructure and it has to be built, whichever way you want to do it, whether through the private sector or government spending, open tender or negotiated, it doesn't matter as long as you move the project. Its worse when there is no project taking off and then it gets painful and frustrating for the people. I'd rather not have that. Therefore, things like PFI should be vigorously encouraged as the private sector is also putting money and risking their capital.

In relation to cement assets, are you looking to expand any more of your assets here? CIMA's up for sale, is that something you're keen on?

We are keen to buy if the seller is keen to sell. I don't think I would be a hostile bidder in our country's context. But if people think that combining or merging with YTL is a synergy and they both can benefit, that's fine with me. I heard CIMA is in talks to be sold. It's also very good that there are foreign investments in this country.

Many observers are upbeat about the group, with new projects coming in. What are the projects that you're eyeing?

A lot of these projects that we're going to do were relevant projects that have been postponed. One of the things that we did in a semi-PFI way and completed was the Mahameru highway to Sentul. That eases the traffic jam a lot now. We began some three years ago and completed it last year, so we've done very well in a PFI way.  

We are quite familiar with PFI-type investments. We have been doing low-cost housing with the government, with a regulatory framework that was friendly to us. The consumer gains at the end of the day. So there are many ways that the private sector can take part in a very active way with the government to solve problems for the poor.  

We welcome the RM20bil in PFI. We are quite sure we are going to win some of that. As long as the government is transparent, they want to welcome groups to come up with good ideas, in this kind of environment, I am very happy.

Do you think that because YTL came up with an idea, for example the bullet train, it is necessary that you are awarded that particular project?

No. I think awarding a contract is predominantly the prerogative of the government. However, the government has consistently been rewarding initiatives and consistently rewarding companies that are world-class. Under Pak Lah, the government consistently wants to benchmark against world-class benchmarks.  

Why should I discourage it? It's not that I am a monopoly in anything. It's just that I have a track record in doing the ERL already, and I could do it so competitively that even the taxi guys are complaining about how cheap I am.  

I hope the RM20bil in PFI will be rolled out quickly and the public will be less cynical. I think it is a great program.

What's the status on the negotiations of the PPAs between IPPs and TNB?

No comment. The way it works is that we should not scream and shout. I want things to move on in this country, slowly but surely in a proper manner. Rhetoric and talk does not help, unless what I say makes sense and there is a balance...I like to share results with my shareholders, I do not need to be a hero.  

I've always advocated the PPAs and their future and vision. I've always advocated a regulatory framework and I've said it many times as it's the most transparent and there is no need for speculation.  

In most cases, we would love to talk about some extensions of the contract, etcetera. This would have come naturally as a business model if not for the fact that there is a perception that the PPAs are too good. So I think it's the right thing for the Minister to call all the IPPs and TNB and come out with something fair, without changing the sanctity of the contract. At the end of the day there are shareholders, people who want stability and consistency.  

I think the Malaysian Government is very responsible and very pragmatic, and will come out with solutions for the IPP issue. And I believe the IPPs will be pragmatic as well. My opinion is that its good to let the Government understand our side of the story and find a solution, like all things. 









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