Surprise railway win for YTL
Company expected to see big jump in construction order book
PETALING JAYA: Among the many railway construction contracts that have been dished out of late, one in particular stands out from the rest.
This is because the recent construction contract for the Gemas-Johor Baru work package was awarded to YTL Corp Bhd, a company which has not been active in the local rail scene of late.
YTL did build the Express Rail Link (ERL) infrastructure back in 1996, but it has been quiet on this front, especially when the numerous rail projects were announced in the past three years.
The surprise win has boosted investor-interest in the otherwise “boring” and predictable stock, according to some in the investment community. The company’s share price has seen increased interest since the contract was announced before Christmas last year.
After an established downtrend of about 14 months since September 2016, the stock had risen by close to 39% in a span of just seven weeks to close at RM1.54 last Friday.
YTL is immediately seen as a very attractive proxy to the very active construction sector with the recent clinching of the railway contract, and investors have stealthily piled on into the price action.
The company had in December last year secured a package for the RM 8.6 bil GemasJohor Baru electrified double-tracking railway project.
“I think the excitement for the railway project has only just started for YTL. Bear in mind that it has been quite a predictable and safe stock all this while and this contract has definitely spruced up interest in it in the short term,” a dealer with a local brokerage said.
The Gemas-Johor Baru double-tracking project involves the construction of 197km of double tracks, stations, electric trains, depots, land viaduct, bridges, and electrification and signalling systems.
The project, which was delayed due to land acquisition issues along the route, is now finally taking off.
According to reports, the project will take around two years to complete.
The impact on the stock is clear, as MIDF Research said that even if YTL scored just 50% of the work packages (or RM4.3bil), the impact on its construction revenue and profit could be substantial.
“YTL’s construction revenue and earnings have been very dismal in the past few years, with a financial year 2016/17 (FY16/17) revenue of RM112mil/RM145mil and RM13mil/ RM57mil in pre-tax profit. The Gemas-Johor Baru project win could easily more than quadruple YTL’s current order book of RM1bil (comprising mostly internal jobs at present),” the research house said.
The company’s construction division has mainly been boosted by its own pipeline of property development and infrastructure works within the group’s other core activities, its annual report stated.
MIDF Research said that assuming a four-tofive-year construction period and assuming YTL secures 50% of the total project value, incremental construction revenue could average around RM1bil per year, while profits after tax (assuming a typical 9% profit margin for rail-related jobs and a four-year construction period) could be enhanced by around RM90mil per annum, a quantum leap versus what the construction unit is generating.
“At the group level, the impact on profit after taxes could be between 8%-10%; construction earnings’ contribution to the group could increase from 3% currently to 8%. This is assuming no third party takes up a stake in the job,” it said.
Reports also said that the company is also looking to take part in the KL-Singapore highspeed rail project, and could be a strong contender for the project if its bid is competitive.
CIMB Research said it was optimistic about YTL’s chances when bidding for the HSR rail operating company (OpCo) tender.
“The OpCo tender, once it is called, would be more relevant to YTL, in our view, given its experience in the 45%-owned ERL – the sole domestic HSR service concession built at only RM35mil per km cost - arguably the lowest cost in the region,” CIMB Research added.
The research house said that even if the potential HSR project was excluded from its forecast, the group is targeting a significant jump in its outstanding order book of up to RM12bil (from RM400mil).
It is also anticipating an official announcement on the Gemas-Johor Baru project contract to be made by YTL soon, once the details of the contract are finalised.
MIDF Research and CIMB Research are positive on the recent developments and have maintained their “buy” call on YTL.
MIDF Research said it has kept its sum of parts-derived target price of RM1.40 per share, pending official announcements from the group.
CIMB Research, meanwhile, has trimmed its FY18-FY20 forecast earnings per share due to housekeeping. Despite that, it has raised its revised net asset value (RNAV)-based target price to RM1.69 as it narrowed its RNAV discount from 20% to 10% to reflect the renewed construction outlook in 2018.