PETALING JAYA: YTL Corp Bhd is mulling a higher dividend payout to attract investors looking for yields, according to a research firm that met with the management of the conglomerate recently.
In a visit note, RHB Research Institute Sdn Bhd said Tan Sri Francis Yeoh Sock Ping, YTL Corp MD, has indicated he is hopeful YTL Corp will transform into a dividend yield play, offering at least 5% net dividend yield in the longer term.
The minimum 5% net dividend yield compares to YTL Corp’s 12-month dividend yield of just above 1% currently, according to Bloomberg.
While the 5% return is comparable to many dividend-centric stocks, it is worth noting that the rate is relative to the share price performance of YTL Corp.
RHB Research estimates YTL Corp’s fair value at RM2.10, implying another 9% upside from its closing price of RM1.93 last Friday.
YTL Corp is not rated by the research firm.
According to RHB Research, what emerged at the meeting was that privatising YTL Corp’s listed entities could be an “option” as the group believes it has not been accorded a fair valuation. “In our opinion, we believe this will help achieve [Yeoh’s] goal of turning YTL Corp into a dividend yield play by reducing the cash outflows to minority shareholders among its subsidiaries,” said the research firm.
It cited the takeover of YTL Cement Bhd as an example.
Minorities were offered YTL Corp shares instead of cash as YTL Corp preferred to conserve cash for future mergers and acquisitions (M&A). “Management will be encouraged by the re-rating of YTL Corp since taking YTL Cement private earlier this year, we believe.
We believe subsequent privatisation exercises of its listed subsidiaries may go the same path as YTL Cement did, [that is] via a share swap,” it said. RHB Research said YTL Corp could start off with privatising companies such as YTL Land Bhd and YTL e-Solutions Bhd, as YTL Power Bhd may simply be “too big to digest for now”.
It said the rationale to privatise the smaller subsidiaries first is to mitigate the potential dilutive effect on the Yeoh family’s stake in YTL Corp if management eventually decides to privatise YTL Power via a share swap.
It is worth noting that YTL Power’s water and power concessions are key contributors to YTL Corp’s earnings, accounting for 65% of the group’s pre-tax profit.
For the financial year ended June 30, 2011, YTL Corp posted a net profit of RM1.06 billion or 11.81 sen a share, up 24% from RM856.8 million or 9.5 sen per share a year ago. RHB Research noted that with the privatisation of YTL Cement, YTL Corp will be able to reduce its reliance on YTL Power and diversify its earnings base.
Furthermore, it is not certain if YTL Power will maintain its level of contribution to the group moving forward, especially if it decides not to extend its power purchase agreement (PPA) for its gas power plants that will be expiring in 2015.
“To extend their domestic PPAs by another 10 years, the first-generation IPPs [independent power producers], including YTL Power, which are benchmarked against the 1,000MW to 1,400MW Prai combined cycle gas power plant will need to cut capacity payments received from Tenaga Nasional Bhd,” it said.
Apart from paying higher dividends, YTL Corp has indicated that it will utilise its cash pile of RM14 billion to undertake M&A. RHB Research noted that YTL Corp is poised to undertake M&A worth RM50 billion to RM70 billion by gearing up.
Taking on additional debt would mean increasing YTL Corp’s current net gearing ratio of about 1.3 times. The group has been sitting on its cash hoard after its acquisition of Japan’s famous ski resorts Niseko Village for US$60 million in 2010.
It was only in May this year that the group acquired three Marriot hotels in Australia for A$400 million. YTL Corp had in the past said it would buy assets in markets with transparent and mature regulatory frameworks such as in the UK, Singapore and Australia.
The group is also eyeing distressed European assets and opportunities from the recent slowdown in China’s property boom.
This article appeared in The Edge Financial Daily on July 23, 2012.