YTL Corp Bhd
(Sept 10, RM1.64)
Maintain add with target price of RM2.29: YTL declared a surprise 9.5 sen third interim dividend in its fourth quarter ended June 30 of financial year 2014 (4QFY14), bringing its total FY14 dividend per sen (DPS) to 12 sen, an 80% or RM1.3 billion payout. The big question among investors was whether this payout is sustainable.
Following our conversations with management and an analysis of its dividend income stream from its businesses, we believe YTL can pay at least 10 sen DPS or RM1.1 billion per year.
Since YTL is a holding company, the only way it can pay dividends is by upstreaming the dividends received from its various units to shareholders. The key driver of this is YTL Cement Bhd, given its strong operating performance and the fact that it has been taken private. It is the biggest contributor to the payout, accounting for at least 40% of YTL’s dividend income stream.
At the same time YTL Power International Bhd’s significance is not diminishing — the company had resumed its dividend paying ability with a 55% payout in FY14.
YTL’s 4G mobile broadband network is turning earnings before interest, taxes, depreciation and amortisation (Ebitda) positive while the possibility of an extension for its Malaysian power plant agreements (PPAs) is high, now that the construction of several key plants, such as Malakoff Corp Bhd’s expansion of its 1,000mw Tanjung Bin power plant, has been delayed.
YTL’s dividend story had been talked about previously but it is now being put into practice to further support it as one of our top picks. The interest of management and minority shareholders are now fully aligned.
With its 50% stake in YTL, Yeoh Tiong Lay & Sons Sdn Bhd is set to receive at least RM540 million a year in dividends. For more than two decades, management has been holding back the payout of dividends because its various units needed cash to build up its businesses or to finance mergers and acquisitions.
With RM14 billion of consolidated cash now on the balance sheet, management and minorities can afford to reap the rewards of paying out a large portion of recurring profits indefinitely.
Our FY15 to FY17 earnings per share forecasts are trimmed due to higher net interest expense from the larger dividend payout. — CIMB Research, Sept 10
This article first appeared in The Edge Financial Daily, on September 11, 2014.