Published on 07 Apr 2021.
RAM Ratings has reaffirmed the AA1/P1 ratings of YTL Corporation Berhad’s (YTL Corp) RM2 bil Medium-Term Notes (MTN) Programme (2013/2038) and RM5 bil Commercial Papers Programme and MTN Programme (2019/2044), while revising its long-term outlook to negative. The outlook revision reflects our expectation that the profitability and dividend-paying capacity of YTL Corp’s operating entities may be challenged by multiple headwinds, exacerbated by the impact of COVID-19. Under our stressed scenario, the combined operating cashflows (OCFs) of YTL Corp and its key utility arm, YTL Power International Berhad (YTLPI), are expected to come in lower at RM600 mil-RM650 mil over the next two years against our previous estimates of RM800 mil-RM900 mil. Accordingly, its company-level OCF-to-net debt coverage ratio could come in close to our rating threshold of 0.2 times.
YTL Corp’s liquidity profile and financial flexibility remained superior, supported by the substantial RM7.68 bil of unencumbered cash under YTLPI, company-level cash balances of RM859.20 mil and RM13.5 bil of realisable net asset value for its operating entities (management’s estimates: RM32 bil). The Group is a diversified conglomerate, operating in three continents and in multiple business lines. Nonetheless, the Group was not spared the effects of the unprecedented COVID-19 pandemic. Some of YTL Corp’s businesses such as its hospitality operations (under YTL Hotels & Properties Sdn Bhd) and real estate investment trusts (REITs) (namely YTL Hospitality REIT and Starhill Global REIT) are among the hardest hit.
The weaker cashflow is also a culmination of pre-pandemic challenges, including the regulatory tightening in the UK water sector (faced by Wessex Water Services Ltd), overcapacity in the Singapore power sector (YTL PowerSeraya Pte Ltd) and local cement industry (YTL Cement Berhad), as well as the non-renewal of the 1BestariNet contract for its mobile broadband division (YTL Communications Sdn Bhd).
Despite marked decline in its pre-tax profit in FY June 2020 (-60%), we observed some q-o-q improvement in the Group’s pre-tax profit in 1Q and 2Q FY June 2021. Notably, the cement and Singapore power generation businesses returned to the black. The Group has integrated its enlarged cement operations in the past year and has recently embarked on a number of asset divestments and acquisitions that could boost its cash pile and lead to some improvements in earnings prospects. The receipt of any sizeable divestment proceeds from planned corporate exercises should be accompanied by sustained improvement in earnings/returns on capital employed towards long-term historical levels and sturdy dividends from the core profit of the Group’s business units for a reversion of the rating outlook to stable, failing which the ratings will be under pressure.
Karin Koh, CFA
(603) 3382 2508
(603) 3385 2577
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Ratings on YTL Corporation Berhad