Construction, ERL and telco business to drive YTL Corp earnings

KUALA LUMPUR: The management of YTL Corp expects its construction, ERL and telco business to be the main earnings driver for the financial year ending June 30, 2017. 

From 2017 onwards, YTL Corp will undertake the US$1bil EPC (engineering, procurement & construction) contract on the Tanjung Jati plant and thus recognise higher construction earnings from the first half of calendar year 2017 over four years. 

“Assuming PBT margin of 10%, this would lift our 2017-2018 estimated EPS by 7%,” said Affin Hwang Capital Research on Tuesday. 

Earnings contribution from the segment has been minimal as it has mainly been an in-house contractor. 

YTL Corp is seeing a gradual traffic recovery after a 20% drop in January 2016 when fares increased from RM35 to RM55. If this trend continues, the company expects the ERL to move from break-even to material profitability by 2017. 

Separately, it is optimistic on bidding for the high speed rail if there is an open tender due to its track record in ERL. 

YTL Corp intends to turnaround the telco business by offering affordable handsets and cheap data when it launches LTE services by June 2016. “However, given that the mobile incumbents expect flat revenue growth in 2016 amid stiff price competition in data, we believe it would be challenging for the telco business to turnaround in the short term,” said Affin.

Meanwhile, the research house believes demand for YTL's premium grade cement should remain robust for infrastructure projects. YTL Cement will also benefit when YTL Power’s US$2.7bil Tanjung Jati 1,320MW coal power plant in Indonesia begins construction later this year. 

The company expects the kick start of major infrastructure projects such as MRT2 to sustain cement demand growth of around 5% over the next few years and mitigate the property slowdown. 

Affin maintains its Hold call on YTL Corp with an unchanged target price of RM1.52 based on 10% holding company discount to our RNAV of RM1.68. It expects YTL Corp to deliver on dividends given that the capex cycle for the cement business has likely peaked, while the group should continue to receive steady earnings from its utilities division.