Target RM1.94 (Stock Rating: ADD)
We are positively surprised by talk of an RM8bn plan by the government to extend the Express Rail Link (ERL) service from KLIA to Malacca. Any such plan could help YTL secure the high-speed rail (HSR) project to Singapore, as the extension would represent a major portion of that contract. We make no changes to our EPS, target price (20% discount to RNAV) or Add rating, with catalysts still expected from expansion of capacity in the cement division and securing the Track 4A power concessions by YTL Power.
What Happened
The government may be looking at extending the ERL service from KLIA to Malacca, according to the Business Times. The RM8bn project would comprise a 45km KLIA-Seremban leg and a 45-55km leg from Seremban to Malacca. Approval would depend on the results of a feasibility study by the Public Transport Commission. ERL CEO Noormah Mohd Noor said that the proposed extension could help ease congestion on major highways in the Klang Valley. "With the ERL, travel time from Kuala Lumpur to Seremban should be about 50 minutes, and an additional 30 minutes to Malacca".
What We Think
This extension could help ERL and YTL secure the HSR project to Singapore, in our view. The HSR involves a parallel line stopping in every secondary town between KLIA and Singapore and this extension would address a major portion of that service. The RM8bn cost of the extension works out to RM90m/km, nearly twice the original cost per km of the ERL. This is not a surprise, taking into account capital-cost inflation and land-acquisition premiums since 2002 when the ERL was completed. The RM90m/km cost would imply a total cost of RM30bn for the HSR, in line with expectations.
What You Should Do
We have not factored the HSR into YTL's valuation. The RM8bn extension and HSR project could fill the current vacuum in its construction profits. Assuming a 5% net margin and 3-year construction period, HSR could potentially add RM130m to YTL's bottom line or 8% to our EPS forecasts. YTL's shares are poised to perform strongly on the back of positive newsflow going into the second half of the year.
copied from
http://splashurl.com/lj5w28r (published 27 May 2014)