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RAM Ratings reaffirms YTL Corp’s AA1/Negative issue ratings

Published on 26 Jan 2022.

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RAM Ratings has reaffirmed the AA1/Negative/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 some business units have seen improvements, we have maintained the negative outlook on our expectations that the profitability and dividend paying capacity of YTL Corp’s operating entities may be challenged by regulatory tightening in the UK water sector, overcapacity in Singapore’s power sector, and the impact of COVID-19 on the Group’s hospitality business and real estate investment trusts. 

Looking ahead, we recognise that divestments may boost the Group’s cash pile and financial metrics in the short term. We have also assumed an indefinite delay in the investment outlay for the Tanjung Jati coal-fired power plant under its key utility arm, YTL Power International Holdings Berhad (YTLPI). Overall, a sustained improvement in YTL Corp’s earnings/returns on capital employed towards long-term historical levels, and sturdy dividends from the core profit of its business units will be key to a revision of the outlook to stable, failing which the ratings will be pressured. 

For the latest fiscal year, we note the better performances by some business units and the completion of several asset divestments that have boosted YTL Corp’s cash pile. The reorganisation of its enlarged cement operations under Malayan Cement Berhad in September 2021 will allow the Group to continually unlock synergistic benefits. YTL Corp’s core pre-tax profit is estimated to have jumped 52% y-o-y in FY June 2021 as the turnaround of its cement operations and Singapore multi-utilities business as well as stronger construction earnings outweighed the weaknesses of other segments. Profits nonetheless still far underperform the Group’s long-term historical levels. 

From a financial metrics perspective, RAM places more emphasis (although not exclusively) on company-level credit metrics as measured by YTL Corp’s operating cashflow (OCF) to net debt coverage ratio. Under our stressed scenario, combined OCF to net debt coverage will be temporarily weak at 0.15 times in FY June 2022 before picking up to above 0.30 times in the next two years as the construction segment’s dividend contribution tapers off from a high base and higher expenses weigh on YTLPI in the interim. We expect YTL Corp’s combined OCF to strengthen to above RM700 mil in the following two years as YTLPI’s expenses normalise and its Jordanian project starts. 

For FY June 2021, YTL Corp’s combined OCF to net debt coverage ratio was a better 0.43 times y-o-y (FY June 2020: 0.31 times) as trimmed net debt levels offset YTLPI’s lower dividends from its water and sewerage subsidiary, Wessex Water Services Ltd (Wessex), and higher expenses. YTL Corp’s unencumbered cash reserves were boosted in part by asset disposals. The ratio also exceeded our expectations of 0.24 times as the debt drawdown and investment outlay for the Tanjung Jati project had not materialised. In addition, the dividends from Wessex exceeded our estimates.

The AA1 ratings consider the Group’s diversified businesses, spanning three continents and multiple business lines. YTL Corp’s liquidity profile and financial flexibility stayed superior, supported by YTLPI’s sizeable RM7.81 bil of unencumbered cash, company-level cash balances of RM904.93 mil and the robust realisable net asset value of its operating entities. We recognise that divestments may boost the Group’s cash pile and financial metrics in the short term but these are transitory and must be accompanied by stronger core profit. 

 

Analytical contacts
Karin Koh, CFA
(603) 3385 2508
karin@ram.com.my

Davinder Kaur Gill
(603) 3385 2525
davinder@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2022 by RAM Rating Services Berhad



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