Published on 26 Jan 2022.
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.
Karin Koh, CFA
(603) 3385 2508
Davinder Kaur Gill
(603) 3385 2525
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Ratings on YTL Corporation Berhad