This article first appeared in The Edge Financial Daily on August 16, 2017

YTL Corp Bhd
(Aug 15, RM1.41)
Maintain hold with a lower target price (TP) of RM1.44: Despite forecasting an improvement in financial year 2018 (FY18) earnings, we believe YTL Corp Bhd’s share price has priced in the earnings growth expectations. The improvement is mainly due the low-base effect in FY17. We are lowering our forecast dividend per share (DPS) to seven sen for FY17 and FY18, due to the declining profit of its cement operations. The decline in profit is too significant that even by increasing the dividend payout to around 85%, it is still not sufficient to maintain YTL’s historical DPS of 9.5 sen. There could also be more downside risks if YTL Power lowers its DPS below 10 sen, as a 0.5 sen decline in YTL Power’s DPS would lead to a 0.2 sen reduction in YTL’s DPS.

FY17 is a challenging year for its cement business due to overcapacity and weak demand from the property segment. Although we are expecting a higher demand from infrastructure and property in FY18, we believe the incremental demand is not sufficient to absorb the overcapacity, limiting the upside of the recovery in earnings. Given that more than 30% of our revalued net asset value (RNAV) is derived from its cement operations, changes in the segment will have a significant impact on our RNAV.

Apart from the construction job for the Tanjung Jati “A” power plant project (which we expect YTL Power to achieve financial close by year end), we believe that YTL could also benefit from rail-related infrastructure projects in Malaysia, given its track record in delivering the Express Rail Link. We expect close to RM120 billion worth of rail-related contracts to be awarded from the second half of 2017 onwards. However, the upside earnings from these contracts are unlikely to compensate for the weaker results overall, in our view.

Despite lowering our RNAV-based TP to RM1.44, we are still maintaining our “hold” call, as we believe that YTL is fairly valued. We cut our forecast earnings per share by 30% to 34% for FY17 and FY18, which also resulted in the DPS being reduced to seven sen from 12 sen previously for FY17 and FY18. Despite lowering our forecast DPS for FY17 and FY18, we believe that FY18 dividend yield of 5% would offer some valuation support. However, the DPS is dependent on how well the cement segment can recover from its low in FY17E. The downside risks include worse-than-expected results from the cement segment and dividend cuts by its other listed subsidiaries. The upside risks include higher construction award wins and higher-than-expected cement demand. — Affin Hwang Investment Bank Research, Aug 15