Saturday, August 28, 2010

A wide palette for investors

By YVONNE TAN

yvonne@thestar.com.my




WITH a sprawling business empire involved in power, utilities, cement, construction, real estate, information technology and leisure, this probably makes YTL group of companies one of the country’s largest family-owned conglomerates.



And here’s the sweet spot. According to its chief steward, Tan Sri Francis Yeoh, the group’s parent YTL Corp Bhd expects to rake in at least RM1bil a year in dividends from these various business units and by 2015, the dividend contribution is expected to double. Much of that, as Yeoh says, can be attributed to the fact that most of its subsidiaries are “maturing into their own strength”.



“We own quality assets and businesses that are generating a lot of revenue,” he says.

YTL snapped up Britain’s Wessex Water Ltd for £544.5mil in cash from distressed firm Enron. The water treatment and sewerage firm has been generating steady earnings for the group.



That may well be an understatement. The YTL group has seen its revenue grow steadily over the years, ballooning to more than RM16bil in the latest fiscal year. The market value of its various listed units collectively come up to a whopping RM34.3bil.



“If you want to buy YTL, we have an enterprise value of RM66bil but I won’t sell … not ever,” he says. Then, another understatement.



“Certainly, we are not a small company anymore,” he says, referring to the group which has grown many fold from a pure construction firm founded by his father over five decades ago.



Although the senior Yeoh had built up the firm to become a respected outfit among its peers, it wasn’t until the younger Yeoh introduced power and utilities into it that it began to draw sustained investors’ interest.



Powering up



Citing the group’s investment in its power and utilities subsidiary as an example of how the group has developed, Yeoh says the initial investment in this area of business was RM300mil.



“Now, it is paying us hundreds of millions in dividends alone,” he says.



The group’s power and utilities subsidiary grouped under YTL Power International Bhd is its largest contributor to bottomline.



The subsidiary has key investments in the areas of power generation, electricity retail and water and sewerage services.



More recently, YTL Power completed its acquisition of Singapore’s second largest utility firm PowerSeraya Ltd for US$2.5bil, paving the way for it to stamp its mark in Singapore’s liberalised electricity market.



The investment has already paid off handsomely.



The unit also owns substantial stakes in Indonesia’s P.T. Jawa Power and Australia’s Electranet Transmission Services Pty Ltd.



International operations contribute more than 80% to total power and electricity turnover, Yeoh says.



Perhaps that is why he appears not too perturbed that YTL Power’s power purchase agreements (PPAs) in Malaysia will soon expire in a few years’ time.



“Most of our revenue is from overseas. I think the days of (selling power) to one client only is over, that is a Jurassic model,” Yeoh says.



In the early 90s, as part of the privatisation of the country’s power generation, YTL Power was one of the few “chosen ones” that had signed “lucrative” PPAs with the state utility firm Tenaga Nasional Bhd for it to sell the power it generated to the latter.



Another treat



Another asset that Yeoh is clearly proud of under the power and utilities segment is Britain’s Wessex Water Ltd, which YTL snapped up for £544.5mil in cash (and assumed £695mil of Wessex’s debts) from distressed firm Enron.



This water treatment and sewerage firm, one of the largest in Britain, has been generating steady earnings for the group. It registers an average year-on-year growth in revenue and net profit of 6% to 7%, Yeoh says.



He opines that there is still tremendous upside potential in the value of this investment.



“YTL is like Warren Buffet’s Berkshire Hathaway which invests in many things like media and banks and confectionery and watch them (investments) grow. But we are different in that we invest purely in infrastructure projects,” he says.



On that note, he is very excited about the potential of YTL’s information technology and e-commerce operations with the launch of the 4G Wimax network planned by year-end.



“We are going to town with it in November, once we prove that we can do it, I’m sure all the telecommunication companies here and abroad will want to partner us. They’re going to be forced to invest. The key here is connectivity for consumers.



“It’s not going to be cheap, we have to be competitive or else how can you set up a business like this?”



To date, YTL has invested RM2.5bil in the initiative. But it’s too early to talk about returns. “Investors expect us to give them returns that they are used to (getting from us),” he says but doesn’t elaborate.



Brick and mortar




Other segments of business under the YTL stable, like the cement manufacturing, property development and real estate investment, are progressing, Yeoh says.



The group is evaluating investment opportunities for its cement manufacturing segment in countries like Indonesia and China.



It already produces around 6.1 million tonnes of cement per annum, making it the second largest local cement company.



In 2007, YTL Cement Bhd was the sole supplier to the Singapore Sentosa Resort, signalling its entrance as a regional cement player.



As for its real estate investments, YTL has just completed the first stage of rationalisation of its retail and hospitality assets via Starhill REIT, which involved the disposal by the Trust of Starhill Gallery and its parcels in Lot 10 Shopping Centre to Starhill Global REIT in Singapore.



Starhill REIT is now embarking on a rebranding exercise to transform the trust into a pure-play hospitality REIT, focusing on a single class of hotel and hospitality-related assets.



The group counts Niseko Village, a prime winter and summer destination located at the southeastern foothills of Mt Niseko An’nupuri in Hokkaido, Japan and the posh St Tropez resort in France among the jewels in its property segment.



“Our profits will continue to increase because we have quality assets. As you can see, this is not a bad company,” Yeoh says, adding that the group has never stopped paying dividends since 1986.



Different strokes



The listed parent YTL Corp has long been a defensive stock pick for an obvious reason – its varied business interests. In fact, some analysts even describe the counter as “boring” which in investors’ parlay could also be taken to mean steady and stable.



Indeed, its share price performance reflects this. Year-to-date, the counter is up a meagre 1% compared to the key barometer, the FBM KLCI, which has gained 10% over the same period.



“Even at the current price of RM7.44, there is not much upside. It’s just a holding company, I’d much rather invest in its subsidiaries, namely YTL Power which forms close to 70% of the group’s bottomline.



“That’s where the real cash lies – the income is recurring and relatively risk free,” says an analyst with a foreign research house.



In a recent note to clients, AmResearch Sdn Bhd said YTL’s upcoming Wimax rollout was likely to generate losses in the first three years.



It also warned that a further appreciation of the ringgit versus pound sterling could erode Wessex Water’s contributions.



The foreign analyst, who has a “hold” call on the stock, sees growth coming only from two main areas for YTL Corp – namely property development and cement.



“The real kicker could be a major infrastructure project like the bullet train project,” he says. But that may well be a non-event given the absence of news flow at that end.



Naturally, Yeoh appears optimistic and remains confident that the project will eventually come through.



“History has taught us that if customers want a project, it will materialise.”



YTL snapped up Britain’s Wessex Water Ltd for £544.5mil in cash from distressed firm Enron. The water treatment and sewerage firm has been generating steady earnings for the group.

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