By Sharen Kaur -Published in NST Property on May 9, 2022
sharen@nst.com.my
YTL Corp Bhd is in a strong position to look for cheap asset sales, with a total merger and acquisition capacity of US$20 billion, according to an analysis by blogger Dragon Leong.
According to him, YTL Corp has an estimated nett cash position of RM650 million at the holding group level, with much more at its subsidiaries such as ERL (Express Rail Link), YTL Land, and Niseko.
He believes the total unencumbered cash reserve within the YTL Group could be as high as US$4 billion or RM17 billion, with about RM10.3 billion sitting in YTL Power International Bhd alone.
"Assuming a debt: equity ratio of 80:20, such unencumbered cash reserve would enable YTL Corp to have a total merger and acquisition capacity of US$20 billion. I believe that under the shrewd leadership of the management, the group will be able to seal some lucrative deals in the next few years," Leong said.
YTL Corp is well-known for purchasing good assets at distressed prices. During the 1998 financial crisis, it purchased Starhill and Lot10 in Kuala Lumpur from Taiping Co, and in 2002, it purchased 100 per cent of Wessex Waters, the UK from the bankrupt Enron group.
The group also purchased landbank in Niseko, Japan at a significant discount.
Leong believes that opportunities will arise soon, as the US Federal Reserve plans to raise interest rates aggressively over the next 12 to 18 months.
Coupled with high inflation caused by the Russian-Ukraine war and economic sanctions imposed on Russia by the US and the West, the global economy is set to slow, and certain countries/regions affected by rising interest rates and high inflation may soon enter a recession.
The yield curve in the United States has just inverted in April 2022. (short term Treasury 2-year bond yields climb higher than the long-dated 10-year bond yields).
"History in past decades shows that once the yield curves invert, the US economy will go into recession within the next two years. I think this round there will be no exception. Aggressive interest rate hikes by the Fed will increase borrowing costs and costs of doing business substantially in coming months, which will dampen the property market and business expansion activities," he said.
High fuel prices and rising food prices will significantly reduce household disposable income, dampening consumer spending. High-debt companies with poor cashflows will be the first to fail, and assets at distressed sales will be available within the next one to three years.
Appreciating long-term assets
The YTL Group owns some assets that will appreciate over time, such as Wessex Waters' regulated assets, prime land in Kuala Lumpur under YTL Land, and the Niseko landbank.
"In my earlier calculations, Wessex Waters may be worth RM45 billion in equity value 20 years later from the current value of RM18.7 billion, Niseko landbank may be worth US$10 billion in about 10 to 20 years later, and YTL Land may be worth RM16.5 billion some years later. These three assets alone will add another RM65.7 billion valuation to YTL Corp, bringing the BlueSky valuation to RM137 billion. If YTL Corp buys more good assets at bargain prices along the way, a valuation of RM200 billion is not impossible eventually," he said.
YTL Corp owns about 1,550 acres of prime land in Niseko, which is ready for development into high-end resorts, homes, and residential projects.
The Niseko landbank, according to Leong, is worth US$0.88 per square foot (psf) at the book (original acquisition cost of US$60 million).
If YTL Corp later sells it at the current market price of US$30 per square foot, it will earn US$2 billion, or RM8.6 billion, he said.
With Niseko becoming a popular ski destination for many Asians, YTL Corp's Niseko landbank, he believes, could be worth much more than US$30 per square foot.
Niseko is home to world-class ski resorts with snow quality that rivals that of Switzerland, and it has recently attracted an increase in tourists from Asia Pacific (within a 7-hour flight).
"YTL Corp bought this land at a discount of say 55 per cent and market value of the land was at US$2.00 psf at that time, then this land value has gone up by 15 times since the group bought it. Assuming that this land value was to go up five times again in the next 10 to 20 years, then it would be worth a whopping US$10 billion to YTL Corp," added Leong.
Possible expansion of REITs
According to Leong, YTL Corp has emerged stronger from the pandemic and will most likely expand the Singapore-listed Starhill Global REIT.
The group owns 37 per cent of Starhill Global REIT, which has a market capitalisation (market cap) of S$1.32 billion or RM4.1 billion and a dividend yield of 5.5 per cent.
The REIT's portfolio consists primarily of retail assets (shopping malls), with 10 mid-to-high-end properties spread across six Asian cities. Wisma Atria in Singapore, Ngee Ann City in Singapore, The Starhill Shopping Gallery in Kuala Lumpur, Lot 10 in Kuala Lumpur, David Jones Building in Perth, Plaza Arcade in Perth, Myer Centre in Adelaide, Daikanyama in Japan, Ebisu Fort in Japan, and China property in Chengdu are among them.
"The REIT's portfolio may expand if YTL Corp chooses to inject unlisted assets into it or manages to acquire other retail assets at a bargain," he said.
With the Covid-19 pandemic situation largely under control in Malaysia, Singapore, and Australia, shopper footfall into the aforementioned retail assets will begin to recover in the first quarter of 2022 (Q1 2022), supporting YTL Corp's continued high dividend payouts.
YTL Corp also holds a 59 per cent stake in the Malaysian-listed YTL Hospitality REIT, which has a market cap of RM1.59 billion. The portfolio of the REIT includes the JW Marriott Hotel in Kuala Lumpur, The Ritz Carlton in Kuala Lumpur (Suite Wing and Hotel Wing), Cameron Highlands Resort, AC Hotel in Penang Bukit Jambu, AC Hotel in KL Titiwangsa, AC Hotel in Kuantan, Pangkor Laut Resort, Tanjong Jara Resort, The Majestic Hotel in KL, Hilton Niseko Village in Japan, Sydney Harbour Marriott, Brisbane Marriott, and Melbourne Marriott.
The ten hotels/serviced apartment properties in Malaysia and one hotel in Japan are covered by a Master Lease structure, in which YTL Hospitality REIT leases these assets back to the respective vendors/lessees to operate the hotel. YTL Hospitality REIT will earn rental income regularly.
The three hotels in Australia are operated by the REIT through appointed hotel managers under a Management Contract.
The rental deferral programme, which ran until June 30, 2022, resulted in dividend yields of 3.3 per cent for fiscal years 2021-2022.
"Dividend yields are expected to jump back to above eight per cent per annum. from FY2023," he said.
With the Covid-19 pandemic largely under control and Malaysia and Australia reopening their borders, visitor flows and hotel occupancy will increase beginning in April 2022.
"Because these hotels are all in strategic locations, I am confident that YTL Hospitality REIT will be able to capitalise on the rebound in tourism activity over the next two years and will be able to declare high dividends of eight to nine sen per share beginning in FY2023. YTL will receive a minimum of RM80 million in annual dividend payouts from YTL Hospitality REIT beginning in FY2023, rising to RM120 million when the hotel business returns to pre-pandemic levels," he said.
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