KUALA LUMPUR (Dec 2): YTL Corp Bhd's shares were traded flat in a volatile session this morning despite CIMB Research maintaining its "add" rating with a higher target price of RM1.85 following the price hikes of Express Rail Link (ERL)'s tickets, which are expected to raise the conglomerate's FY17 and FY18 earnings per share (EPS) by 4% to 5%.

At 11.10am, YTL Corp was up 1 sen or 0.65% at RM1.55.

YTL's 50%-owned associate, ERL Sdn Bhd, announced yesterday that ERL ticket prices would go up by 57% on Jan 1, 2016, the first revision since ERL commenced operations almost 14 years ago.

From Jan 1, 2016 onwards, the fare will be RM55 (from RM35) for a one-way trip between KL Sentral and KLIA/klia2. This is a discounted rate as ERL has been authorised to revise the fare to RM64, based on the terms of the concession agreement.

CIMB said this news was a positive surprise although there were earlier indications that ERL fares were up for review.

The research house saw the move as timely due to operating cost pressures and new capacity, and opined that the increase in ticket prices was to largely compensate for the rise in operating costs for the fast train operator, particularly for electricity, which constituted more than 50%.

The new rates coincide with ERL's 50% capacity increase. By May 2016, six new trains will be progressively delivered to cater to the growing ridership. ERL captures about 14% share of the daily passengers travelling to klia2, which has upside, according to the research report.

As ERL has been a steady earnings contributor to YTL Corp since 2014, when its operations broke even, CIMB raised its FY17 and FY18 EPS forecasts by 4% to 5%, to factor in the estimated blended new rates incorporating both the ERL and KLIA transit services.

"A 50% share of ERL's earnings typically makes up 2% to 3% of YTL Corp's total group pre-tax profit. We keep our FY16 EPS unchanged as the rate hike will only be in force for half a year and could be mitigated by competitive pressures affecting cement earnings," it said.

Meanwhile, CIMB said, the rate revision substantially raised the estimated discounted cash flow value of ERL by around 50% to RM2.4 billion as it had not factored in the quantum of the fare increase.

However, since the ERL component chips are less than 5% (11 sen per share) to total sum-of-parts (SOP), this resulted in a net increase of 3% to SOP per share from RM2.25 to RM2.31.

On top of the rate increase, CIMB is of the view that ERL has potentially more upside to earnings as MRT 1, which will be operational in 2017, should feed through more riders.

"Another potential catalyst is the progress of the High Speed Rail (HSR). YTL has the cost advantage and experience from running the ERL. It also has a strong balance sheet for a private-public partnership-type model," it said.

(Note: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)