Cover Story All the cash but nothing to buy

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Almost a year ago, Tan Sri Francis Yeoh Sock Ping, who leads the YTL group of companies, made clear his intention to buy assets from distressed owners — opportunities opened up by the economic crisis. His plan was to utilise his war chest of some RM12 billion held mainly under flagship YTL Corp Bhd and subsidiary YTL Power International Bhd.

He had enthusiastically told a newswire late last year, “We have an army of people combing through deals…Valuations are going down by the day. I’ve been waiting for this moment for a long time.”

Many investors were waiting as well for the YTL group’s public-listed companies, namely YTL Cement Bhd, YTL Land & Development Bhd, YTL E-Solutions Bhd and YTL Power, to get into the thick of action and go on a buying spree. However, a year down the road, it’s mainly the purchase of 26% of Macquarie Prime REIT (since renamed Starhill Global REIT) and 50% of the holding company of the REIT management company for a total of S$285 million (RM689 million) that is seen as fire-sale acquisitions. That’s smallish for the YTL group.

YTL Power paid about RM9 billion for Power Seraya, which generates electricity in Singapore but the seller, Temasek Holdings, is by no means a distressed party.

In an exclusive interview with The Edge, Yeoh explains why opportunities slipped through and why the YTL group could not snap up assets as planned to expand its horizons, capitalising on the weak economic environment.

“Since the worldwide implosion last year, you would expect fruits to be not only low-hanging, but also to be picked from the floor. But because of government bailouts, and quantitative easing, banks did not need to take haircuts… So there were no real big deals to cut like in the old cycles,” he says.

Nevertheless, he points to YTL group’s two acquisitions, namely Power Seraya and the Starhill Global REIT, as being significant and of good value. 

“I think the assumption is very different from fact; if you go through the details, for one, Starhill Global was bought at 50% of its net asset value, and we know it’s a good price… Technically, the valuations come down, and you can’t see deals of real estate transacted at half of net asset value, except through a REIT. That was the only choice I had… control a REIT and I bought that at 50% of net asset value. 

“Now, for [Power] Seraya we paid 10 times Ebitda (earnings before interest, tax, depreciation and amortisation). A lot of people said it was an expensive acquisition. Temasek, of course, bought it very cheap, so any price that Temasek sells will have a tremendous, positive impact on its balance sheet, as the cost of its acquisition is very low... So, from that point of view, compared to what Temasek paid for it, yes it seems expensive, but when compared to the fact that I paid only 10 times Ebitda, it is cheap, as some people pay up to 16 times Ebitda.

“Also, considering I was the only bidder, they (Temasek) almost cancelled the bidding… that reflects that [the situation] at that time; no one had the money and the banking system was already clogging up, so nobody could raise funds to take it. That represented a great opportunity for me, so whether it’s expensive or not is up to the people to judge. But you can see that whatever assets we acquire, we hope to make profits more than what we conservatively estimate,” says Yeoh.

Indeed, Power Seraya was conservatively valued in that bid that was required to be made within a short time. Power Seraya made a pre-tax profit of RM197 million for the four months ended June 30, and annualised, it would contribute a net profit of RM480 million, 2.7 times the estimate of RM176 million at the time of the acquisition, according to analysts. A last chance to shopAlso, interestingly, Yeoh is hopeful of another chance of getting his hands on some assets that are still under-valued and reap the benefits at the tail-end of the recession, before a full recovery lifts all asset classes back to the peak prices.

Without divulging any details, he says that within the next year or so, the YTL group may be able to make a few large-scale acquisitions if things fall into place.

“There are some deals now and we are in a hurry to snatch a few [properties]. We hope to purchase very good properties within the next year or so. And, we hope there will be one adjustment, where banks and hedge funds will take a haircut.

“Starhill Global today has about RM5 billion worth of assets, and with some acquisitions, we are talking about reaching RM6 billion to RM7 billion soon. Then with that size, you can gear up and grow exponentially,” he says.

Yeoh and his string of companies, which have been sitting on a hefty war chest for sometime, are always on the lookout for distressed assets that come into the market in conditions of turmoil.

YTL had made a name buying distressed assets such as the Lot 10 shopping complex, in the heart of KL’s Golden Triangle, from Datuk Sulaiman Abdul Manan’s Taiping Consolidated Bhd in 1998. YTL emerged as the controlling shareholder of Taiping Consolidated after the Asian financial crisis brought the property company to its knees.

Flagship YTL Corp acquired Taiping Consolidated through a reverse takeover, and later changed its name to YTL Land & Development.

In 2004, YTL Corp bought a 35% stake in PT Jawa Power for US$139.4 million or about RM530 million from PT Bumipertiwi Tatrapradipta, giving it access to the Indonesian market, where PT Jawa Power is the country’s second largest independent power producer (IPP).

PT Jawa Power supplies power to PT PLN, the Indonesian state-owned integrated utility company which had run into problems when PT PLN had difficulty paying the IPP after currency losses.

Then there was the celebrated utility player Wessex Water Ltd, which was acquired when Enron was in turmoil in 2002. YTL Power snapped up Wessex Water for £544.5 million in cash, and assumed £695 million of the UK water company’s debts.YTL Power had also acquired 33.5% of Australia’s ElectraNet, which owns and operates the power transmission network in South Australia, for some RM1.9 billion in 2000. ElectraNet has a 200-year concession.

Yeoh takes pride in YTL acquiring assets and becoming a good steward in growing the business and values of these assets. That has been the group’s track record.

In addition, with the acquisitions, he explains that about 85% of YTL’s business is from abroad, indicating the group’s prowess in securing international jobs via open tender. However, despite his international footprint, the focus now will be Asia.

Asia in vogueYeoh shares the views of certain experts who believe the next decades will see Asia growing from an emerging market to a global economic powerhouse.

Among the more prominent businesses that may thrive on the continent will be power generation, water treatment, construction, hotel operations and the rollout of Internet facilities — all of which have tremendous potential, and all of which YTL already has some presence and expertise in.

“We have to gear our management to take advantage of this. We already have shopping centres and cement  in China... we have our footprint everywhere. In Indonesia, we own the second largest power plant, in Singapore we have (Power) Seraya… so, we have an Asian footprint already… we are not hostage to geography, and this geography of Asia will lead growth in the next 20 to 25 years,” he says.

While it is no secret that economies, such as China and India, are booming and have managed to maintain their appeal despite the weak economic climate, Yeoh says the Southeast Asian region is also likely to see growth over the next two decades.

Yeoh believes that tourism and related industries in this region could be an incubator for bigger things. The growth in this region will keep his companies busy in the years to come. He equates the tourism and property development potential of Southeast Asia with that of the Mediterranean and the Caribbean. 

“There are lots of opportunities to make money in Asia… lots and lots of opportunities. Southeast Asia is actually the Mediterranean and Caribbean of the East.

“When we look at it from a real estate perspective, the Mediterranean took 25 years to develop from nothing… from Saint Tropez to Porto Cervo; in all the 25 years, land values there went up 5,000% psf, because the wealthy in the Mediterranean and nearby countries bought homes there,” he explains.

Yeoh says YTL has little footprints from Langkawi to Bali to Sentosa in Singapore, and this could be the next area for YTL to tap.

“Asians are savers... when they want to buy a second home, [they will scout from] Singapore to Bali to Phuket. You will see exponential growth and with that growth, of course, there are needs for cement, housing, furniture and construction. That’s how land values in Spain became so huge, because the British and the world were buying homes in Spain. All this will happen in Asia.  I see a whole industry in real estate and ancillary industries moving in this direction from restaurants to tourism,” he adds.

This will also generate the need for power and water, areas where YTL has expertise. Many new opportunities present themselves as well.

“For example, are there cruises in these beautiful [Asian] waters like those in the Caribbean or Mediterranean? I am talking about big yachts, 100ft or 200ft where people pay US$100,000 on a weekly basis. There are hundreds and thousands of boats in the Mediterranean and the Caribbean… nobody in Asia knows how to do this business… I’ve got our people together and we are starting this business.

“I have been watching... there are now marinas in Singapore, Phuket, Langkawi, Pangkor, but they are not connected as yet — this lifestyle has yet to catch on as Asians are savers. But in the next 10 years, when this lifestyle catches on, you are going to find people buying boats, and all this is going to come,” he adds.An unexciting investment proposition?Despite the big plans and possibilities looming, many analysts view the companies under the YTL banner as unexciting. A market watcher says, “They are considered very conservative. Also, there are questions about their lack of political clout now… YTL Power [International] pays good dividends but there is still lack of excitement,” he says.

Yeoh defends the group’s strategy and focus. “YTL’s management philosophy is simple and it’s based on long-term business models. So, yes, short-term investors don’t quite like us. But I also know investors who are long term, who started in 1986 with me. It doesn’t matter if hedge funds don’t like my long-term story or model.

“I know serious business models always win…. and that should be given much more credit. The good thing about YTL Corp is that we have never stopped paying dividends since 1986. If you had invested RM1 million with me in 1986, it would be worth RM140 million today… that is a good track record by any standard. These long-term policies have long-term returns,” says Yeoh.

According to Bloomberg, of the four listed companies, YTL Corp, YTL Cement and YTL E-Solutions pay dividends while YTL Land & Development has yet to do so. YTL Power’s gross dividend yield exceeds 7%, while YTL Cement’s is in excess of 3%. YTL Corp, which is the flagship which trades around RM7.30, has a gross dividend yield of about 0.3%.

Nevertheless, Yeoh is optimistic about his flagship company’s prospects. “In the next two or three years, you will see YTL Corp jumping from RM6 billion turnover to RM12 billion turnover and the profits will jump significantly… this is because of Seraya and many brands, the size is more exponential. It’s going to be on the global radar screen,” he says, suggesting that the “boring” tag may be a thing of the past.

This article appeared in The Edge Malaysia, Issue 777, Oct 19-25, 2009.