Asiamoney, January 23, 2009
Well capitalised Malaysian conglomerate YTL Corp. is on the acquisition trail to pick up cheap assets in tough markets. But while Yeoh, who was Asiamoney’s top Malaysia executive in 2008, believes his Christian faith is responsible for YTL’s success, his business acumen has certainly helped.
By: Naomi Rovnick
Unique is the only word to describe Francis Yeoh.
The managing director of sprawling Malaysian hotels-to-cement conglomerate YTL Corp. is an evangelist Christian billionaire, is fond of sermons but also loves to party.
“I have always credited God as an inspiration and guiding light to this company. That I think is pervasive and I hope that will be taken into account,” the tycoon enthuses to Asiamoney.com, when asked how he got his company into such fine financial shape.
Unnervingly, Yeoh peppers many answers to financial questions with references to his faith and the lessons it teaches him.
But he is also a total charmer, often responding to questions with gushing comments such as “that is so clever, how perceptive”.
No-one is normally this nice to journalists. Yeoh probably treats his cleaner with reverence, too.
Yeoh’s frequent references to the power of the divine when discussing corporate strategy may not sit comfortably with all, but it’s hard to dispute that YTL remains in very fine fettle during a global financial crisis.
While corporate earnings collapse on the back of global recession, analysts polled by Thomson Reuters expect pre-tax profit at YTL Corp. to grow 7% to RM2 billion (US$553.6 million) in the year to June.
Part of the reason for this performance is Yeoh’s aversion to leverage. He opted not to pile on debt to make expensive acquisitions in recent years.
YTL Corp., the parent company in the conglomerate’s fiendishly complicated structure, is unscathed by the credit crunch and is sitting on RM12 billion in net cash. Yeoh is now dashing around the world, buying cheap assets.
YTL’s power division bought Temasek’s PowerSeraya for S$3.8 billion (US$2.54 billion) in December. A month earlier, the conglomerate scored a property coup, picking up a set of prime real estate in Singapore’s trendy Chinatown from Australian bank Macquarie for a bargain 51% of net asset value.
And the tycoon exclusively reveals to Asiamoney.com that a spree for London luxury shopping centres is likely to be his next move.
Every M&A banker in Asia and Europe, if they don’t already, should aim to get Yeoh on speed dial – even if it does take those who do not know him a while to work him out.
With his serene smile, kind eyes, rosy cheeks and short limbs, the calm, portly Chinese man almost resembles a corporate version of the Buddha. But he sounds more like a mixture of Bible-belt preacher and excitable socialite. He speaks perfect English but at a rapid clip, with no obvious punctuation. Fascinating contradictions abound in Yeoh’s background.
He is descended from Chinese immigrants to Malaysia, an ethnicity that is evident from the way his secretaries are decorating his office for the Lunar New Year as he meets Asiamoney. Yet Yeoh regularly hob-nobs with Abdullah Ahmad Badawi, the leader of Malaysia’s Umno ruling coalition, which can be fiercely anti-Chinese in its promotion of so-called Bumiputera, or ‘ethnic Malaysians first’, policies.
Colleagues describe Yeoh as intensely shy, but his office lobby is wall-papered with virtually life-size framed photos of him and celebrity friends, including the late Luciano Pavarotti.
For all his social preferences, Yeoh is dedicated to his business. He was handed the leadership of the family construction firm by his father when he was just 26 years old, and set about transforming YTL into the sprawling conglomerate it is today.
Putting shareholders first
YTL looks like a hotch potch of diverse assets. The structure is also complex. But, mirroring its boss' personality, the unique and complex way the company is organised is also extremely clever.
The conglomerate is based in Malaysia, but nowadays 49% of its annual revenues come from overseas. International assets include UK water provider Wessex Water, Australian electricity provider ElectraNet and Chinese cement producer Jin Yuan.
In Malaysia, YTL owns the Ritz Carlton and Marriott hotels in Kuala Lumpur, the express train that ferries passengers from the capital’s Sentral station to the airport and a bundle of contracts to build and operate power plants.
YTL Corp. is the parent company, and it trades on Bursa Malaysia for a current valuation of RM12 billion. It in turn runs a group of companies listed on the same bourse, owns majority stakes in all these subsidiaries and collects its share of their revenues and profits.
YTL Power owns the Wessex Water, ElectroNet and the power plant contracts. YTL Cement comprises Jin Yuan and a range of Malaysian and international construction contracts. YTL Land and Development builds houses in Malaysia and owns 2,000 acres of undeveloped land. Starhill Reit owns the Kuala Lumpur luxury hotels plus Starhill Gallery, the Malaysian capital’s most upscale shopping centre.
The set-up looks unwieldy, but Yeoh deliberately conceived it with shareholders in mind.
Investors traditionally shy away from conglomerates. They may like the future prospects of one division, but not another. But with YTL they can own shares in the parent company for exposure to all of its assets, or alternatively they buy shares in the YTL division of their choice.
There is a connection between YTL’s seemingly disparate businesses, too.
Excepting Starhill’s luxury hotels and YTL Land, each of YTL’s subsidiaries benefit from long-term, recurring revenues. That ensures that the conglomerate earns money whatever the economic climate.
“Over 80% of our group’s revenues are recurring,” says Yeoh. “And this is why I can sleep at night”.
For example, Wessex Water has a rolling 25-year licence to provide water and sewerage to 1.5 million users in south-west England. YTL Corp. has a 60-year contract to operate the express train service from Kuala Lumpur Airport to Sentral station, which has 53 years left to run. Most of YTL Power’s power plant contracts run for 15 years or more. The retailers in Starhill Gallery have all signed up to long-term leases.
Seeing through the debt bubble
Long-term contracts have always been the engine room of Yeoh’s business.
When he began running YTL, the first place he looked for opportunities was former Malaysian premier Mahathir Mohamed’s privatisation drive, which started in the late 1970s and continued until the 1997-8 Asian crisis.
YTL gained the government’s first independent power producer contract in 1993, and Yeoh has built YTL conservatively ever since.
“I see myself as a long-term steward of God’s wealth,” he explains.
Ah, God again. Such fervent sentiments might unsettle unbelievers. Yet if the Christian way of running a business is to consider the needs of future generations of shareholders, instead of chasing short-term profits and overpriced acquisitions, it should be applauded.
The Malaysian tycoon waits for cash to come in before he spends it on new assets. He sidestepped the credit crunch by refusing to load YTL businesses with debt.
“I never like high gearing. Some borrowing is always necessary. But I always remember borrowing money is very dangerous,” he explains.
“My grandfather only had the shirt on his back when he came to Malaysia from China. We always save for a rainy day, and also make sure we don’t get caught in a rainy day situation.”
Many disgraced bosses of collapsed western banks would have benefited from Yeoh’s ethics and business strategy.
Yeoh knows what he’s talking about, having sheltered from the Asia financial crisis. Scores of Malaysian businesses went to the wall because they had borrowed in US dollars and when the ringgit collapsed, they could not pay their loans.
But Yeoh foresaw the currency risks of borrowing abroad. In the early 1990s he had decided that any debt YTL needed should be sourced locally and denominated entirely in Malaysian ringgit as much as possible. In 1993, YTL launched Malaysia’s first ever ringgit bond, to finance the IPP contract it had just won.
This borrowing strategy ensured that YTL’s profits rose during 1997 and 1998. That enabled Yeoh to tour Asia in 1998, picking up competitors’ assets on the cheap.
Yeoh’s philosophy means that he has sacrificed some lucrative money-making opportunities in the past.
He reveals that, in 2006, he looked seriously at listing YTL Power on the London Stock Exchange for around £2.4 billion (US$3.33 billion). But during initial roadshows, City investors said they would not accord YTL Power shares a premium rating if the subsidiary did not take on heavy borrowings.
As ridiculous as they may seem now, back in 2006, phrases such as “financial efficiencies” and “working the balance sheet” were mantras of the financial industry, as companies increased leverage to improve their return on equity.
“People criticised us for a low return on equity in YTL Power. I’ve suffered a bit from the City’s lack of rating on my stocks. But for me, being conservative is always correct.”
After a few weeks of early stage investor meetings in the City of London, he flew back to Malaysia without a deal.
He does not regret the decision, despite the money he could have raised. “Investors were paying 30% above annual revenue for companies like ours.”
“This short term-ism, this myopia, this tyranny of shareholders demanding a high profit every quarter, there’s so much wrong with that,” he adds. “If CEOs, investors had not thought like this, perhaps the world would not be crumbling.”
But the greed of others now means that YTL has another tremendous business opportunity. Yeoh is once again jetting around, seeking to buy assets cheaply from firms that are struggling to refinance their debt loads.
Yeoh has zeroed in on London in his hunt for cheap corporate swag, especially seeking out luxury shopping centres in upscale London districts such as Knightsbridge.
Britain is consumed by a savage recession and many landlords are desperate to sell. Commercial property rental yields are running at around 10%, making buildings incredibly cheap. Yeoh believes that values have not been so low since 1992-93, when Britain dropped out of the exchange rate mechanism and headline interest rates hit 12%.
The Bank of England this month slashed interest rates down to 1.5%, the lowest in more than 300 years, but Yeoh has the cash to buy. It’s likely he will make a move on an upmarket London shopping centre or two quite soon.
“I have met everyone [in UK property] that is very serious that wants partners today going long-term in London. People in London know we are decent people and what we’re looking for, that we are not vultures but we are looking for reasonable deals.”
When asked if he’s worried he will lose money buying assets in economically unstable Britain now, Yeoh channels Warren Buffett, the “sage of Omaha” and world’s most famous contrarian investor.
I believe that if assets are good and historically cheap, we should buy them,” he says. “Like the Omaha oracle, you must look at the business, not the emotions of the market.”
He continues: “I always want to be a contrarian. If the market is saying utilities are boring, we buy them. If the market is saying use debt, we hang on to our cash. It has served us very well so far.”
Francis Yeoh may attribute YTL’s success to divine intervention, but his business acumen and contrariness have also played vital roles. The next time he attends a celebrity party he should raise a glass to himself, as well as his heavenly benefactor.