YTL Corp. All systems go

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1 YTL Corp RM BUY Chia Aun Ling aun.ling.chia@clsa.com (603) Anthony Wilkinson Head of Power Research (44) February 2005 Malaysia Power Reuters Bloomberg YTLS.KL YTL MK Priced on 23 February 2005 KLSE M price target RM6.20 ±% up/downside +19% Target set on 23 Feb 05 Market cap US$2,0m Shares in issue 1,474.6m Free float (est.) 35.2% 3M average daily volume RM9.0m (US$2.4m) 12M high/low RM5.50/3.79 Foreign shareholding 13.0% Major shareholders Yeoh Tiong Lay & Sons 49.5% EPF 15.3% Stock performance (%) 1M 3M 12M Absolute (1.0) Relative Abs (US$) (1.0) (RM ) Feb-03 Aug-03 Feb- Aug- YTL Corp (LHS) Rel to Comp (RHS) Source: Bloomberg (%) All systems go YTL Corp is currently in a sweet spot with all core divisions well positioned to deliver growth. Underpinned by acquisitions and organic growth, we forecast -06 cagr of 20%. With 06 PER at 11.1x and upside from imminent property asset unlocking, we see a 19% share price appreciation from current level. Our new target price of RM6.20 values the stock at RNAV or implied 06 PER of 13.0x. Upgraded from O-PF to BUY. New growth phase YTL Corp is firing on all cylinders. Core divisions like utility, cement and property are projected to deliver earnings growth of 15-41% over the next three years, underpinned by both organic and acquisitions. Following the recent earnings upgrade at YTL Power (by 6-10%), we have also revised up YTL Corp earnings to factor in contributions from Perak Hanjoong and the latest property launches. The net impact is an earnings upgrade of 19-27% over FY (see fig 4 for breakdown). Ripe for unlocking Three of YTL s investment properties two shopping malls and a hotel building are to be injected into a REIT. This exercise will allow YTL to unlock value of its investment properties which has a combined book value of about RM400m. Based on gross yield of 6% and estimated annual rental Ebit of RM50m, YTL could raise RM408m from this exercise if it were to retain a 51% stake. Acquisition upside YTL Power, Tanjong, AIG, and Mitsubishi/CLP, have been short-listed for the acquisitions of 100% stake in Intergen. The Intergen portfolio consists of 7844MW of generating assets via 10 international plants and is reported to be worth US$4.8bn including US$3.3bn of debt. If successful, YTL Power will likely gear up rather than tapping the equity market to finance its equity portion. Cheap big cap stock YTL Corp is one of the cheaper big cap stock in the market, trading at 11.1x 06 earnings against 2-year EPS cagr of 20%. If we were to strip out YTL Power, the rest of the operations are trading at 9.2x. With reputable management, decent growth, support from share buy back programme, and imminent unlocking of asset values, we see good upside potential. Target price raised to RM6.20 on RNAV or implied 06 PER of 13.0x. Financials Year to 30 Jun 03A A 05CL 06CL 07CL Revenue 4, , ,2.62 5, , Rev forecast change (%) Net profit NP forecast change (%) EPS (sen) CLSA/consensus(8) (%) Core EPS (% YoY) PEx (@RM5.20) Dividend yield (%) FCF yield (%) - (1.3) (0.7) ROAE (%) Upgrade Earnings & Recommendation Find CLSA research on Bloomberg (CLSA <go>), firstcall.com, multex.com, and use our powerful CLSA evalu@tor database at clsa.com

2 Earnings upgraded Combination of acquisitions (in the likes of Jawa Power and Perak Hanjoong) and organic growth (aggressive property launches and Wessex water rate hike) are driving YTL Corp into the next growth phase. Based on our latest forecast (after a 19-27% upgrade), YTL is set to record a 2-year core EPS cagr of 20.0%, underpinned mainly by stronger performances at power/water, cement and property divisions. Upgraded YTL Power s earnings by 6-10%. See YTL Power s Playing Catch up morning pack note on Feb 21. Earnings growth to accelerate following the acquisitions of 64.8% in Perak Hanjoong and the remaining 50% stake in Pahang Cement Upgraded YTL Cement s net profit by 27-47% over FY05-07 after Perak Hanjoong s acquisition YTL Power is projected to grow by 20% over the next two years. This is to be driven by (i) Jawa power plant acquisition; (ii) Jawa O&M operation; (iii) Wessex water rate hike starting April 2005; and (iv) interest savings of RM42m a year from the buy back and conversion of USD$150m bond. YTL Power is still the biggest contributor, accounting for 65% of YTL Corp s net profit. Every 10% change in RM/USD rate varies YTL Corp s 06 net profit by 2.2%. YTL Cement 2-year earnings cagr of 28%. The cement operations is going through an aggressive capacity expansion following the acquisition of the remaining 50% stake in Pahang Cement in March 20 and more recently a 64.84% stake in Perak Hanjoong. With Perak Hanjoong, YTL Cement has more than tripled its clinker capacity to 4.2m metric tonnes, making it the second largest integrated cement producer in the country with a 24% market share. Perak Hanjoong had been loss making in most of the years due to its high operating and financing costs. We expect an operational turnaround under the management of YTL which has superior production efficiencies and better cost control. For a start, YTL has restructured Perak Hanjoong s existing debt with 200 basis point or RM20m interest cost savings per annum. Figure 1 Clinker capacity market share in Peninsular Malaysia = 17.2m tonnes Tasek 13% Perak H 17% Lafarge M 47% YTL Cement 7% CIMA 16% Source: Cement Concrete Association of Malaysian 2 aun.ling.chia@clsa.com 24 February 2005

3 Figure 2 Figure 3 Pahang vs Perak Hanjoong Cement - Revenue Perak Hanjoong Cement s pretax profit Perak Hanjoong Pahang Cement ( E (10.0) (20.0) (30.0) (40.0) (50.0) (60.0) Source: Pahang Cement; YTL Cement Upgraded property profit by 10-75% to reflect new project launch to deliver 50% 2-year earnings cagr. Coming from a low base, the property division is expected to see strong earnings momentum thanks to the healthy Klang Valley property market and more aggressive launches. Other than a successful launch at its Puchong project, the next big launch will be Lake Field, a JV project with EPF. EPF will have 20% share of the units developed as compensation for providing the land. This development will have a total GDV of RM925m, to be developed over the next three years (FY05-07). Assuming a gross development margin of 20%, this project could generate gross profit of RM185m over the next five years. YTL Land currently has roughly RM200m of unbilled sales and target to launch RM425m worth of properties in Figure 4 What s driving growth? Net profit breakdown 03A A 05CL 06CL 07CL Comment Power/Water Rate hike, interest savings and Jawa power acquisition contributed to growth Cement Additional stake in Pahang Cement and acquisitions of Perak Hanjoong development New property launches investment/hotel EI gain Others O&M, interest and dividend income, construction, IT, management services, ERL and etc TOTAL Core net profit Core net profit growth 47.3% 15.9% 27.4% 18.1% 7.6% Figure 5 Figure 6 FY05 net profit breakdown 2-year divisional net profit cagr (FY-06) development/ investment/ hotel 9% Others 17% 60.0% 50.0% 40.0% 30.0% 20.0% 14.9% 20.6% 22.7% 42.2% 50.2% Cement 9% Power/Water 65% 10.0% 0.0% 3.0% inv/hotel Cement Power/Water Core net profit Others development 24 February 2005 aun.ling.chia@clsa.com 3

4 Trading at 15% discount to our sum-of-parts valuation Valuation YTL Corp is valued at RM6.21 (our target price of YTL Power which is based on 5% premium to DCF) or RM5.57 (YTL Power at market) per Fd share based on the sum-of-parts methodology. If we were to strip out YTL Power s market cap, YTL Corp s non utility operations are trading at 06 PER of 9.2x against 3-year earnings cagr of 22.4%. Non power divisions are trading at 9.2x 06 PER Figure 7 Break-up analysis Share price (RM) No of shares (m) YTL Market Cap YTL Power's Market Cap Market valuation for non power assets Mkt cap Non power net profit (FY06) PER on non power operations (x) 9.2 Figure 8 YTL Corp RNAV breakdown Share price (RM) Stake Market Cap DCF /RNAV YTL Power % YTL Cement % YTL Land % YTL E-solution % Other business PER Valuation Construction Power services Other landanks/invest Prop ERL 50% Other investments at book Company net borrowing (860.6) Total Basic share base (m) Basis RNAV Diluted share base (m) Diluted RNAV Figure 9 Figure 10 Conglomerate RNAV discount comparison Relative performances 0% -5% Genting Sime Darby YTL Corp % 115 KLCI Genting YTL Corp Sime Darby -10% -15% -20% -13% -15% % -30% -24% 85 Jan- Feb-Mar- Apr- May- Jun- Jul- Sep- Oct- Nov- Dec- Jan-05 4 aun.ling.chia@clsa.com 24 February 2005

5 Figure 11 Big cap conglomerate comparison FY FY05 FY06 P/Core earnings (x) Genting (calendarised) Sime Darby YTL Corp Dividend yield (%) Genting Sime Darby YTL Corp P/Cashflow (x) Genting Sime Darby YTL Corp P/Book value (x) Genting Sime Darby YTL Corp EV/Op ebitda (x) Genting Sime Darby YTL Corp Growth (%) EPS growth Genting Sime Darby YTL Corp(core) Returns (%) Return on equity (%) Genting Sime Darby YTL Corp Gearing Net debt/equity (%) Genting (26.8) (35.0) (42.4) Sime Darby (2.1) 6.0 (1.6) YTL Corp Note: In the interests of timeliness, this document was not edited. Key to investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = outperform by 0-10%; U-PF = underperform by 0-10%; SELL = underperform by >10%. Performance is defined as 12-month total return (including dividends). Additional information is available upon request CLSA Asia-Pacific Markets. The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to any change of our views. This is not a solicitation or any offer to buy or sell. CLSA Asia-Pacific Markets has produced this report for private circulation to professional and institutional clients only. All information and advice is given in good faith but without any warranty. CLSA Asia-Pacific Markets, its affiliates or companies or individuals connected with CLSA Asia-Pacific Markets may have used the information set forth herein before publication and may have positions in, may from time to time purchase or sell or may be materially interested in any of the securities mentioned or related securities. This report is subject to the terms and conditions of use set forth on the website. MITA (P) 105/12/20. V MSCI-sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by CLSA Asia-Pacific Markets. 24 February 2005 aun.ling.chia@clsa.com 5