This article first appeared in The Edge Financial Daily, on July 28, 2016.

YTL Corp Bhd
(July 27, RM1.67)
Maintain neutral with an unchanged target price (TP) of RM1.50: YTL Corp Bhd is proposing to take Bursa Malaysia’s ACE market-listed YTL E-Solutions (YTLE) private via a share swap. YTL Corp already owns an approximately 74% stake in YTLE and in this exercise, it is proposing to take up the remaining 26%. YTLE currently entails approximately 1.3 billion shares outstanding and the 26% not already owned by YTL Corp translates into about 348 million shares.

The proposal values YTLE at 55 sen per share, based on its five-day volume-weighted average market price (VWAP), and YTL Corp at its five-day VWAP of RM1.65 per share. This translates into a share-swap exchange ratio of around 0.33 new YTL Corp shares for YTLE shares. The estimated total YTL Corp shares to be issued in this case are 116 million in exchange for 348 million shares in YTLE (representing the 26% not already owned by YTL Corp in YTLE).

Offsetting the impact between share dilution and value expansion are: i) a 1% dilution in shareholding in YTL Corp given the issuance of 116 million new shares in YTL Corp (versus base share outstanding of 10.4 billion) to the minority shareholders of YTLE; and ii) a 1% expansion in absolute value of YTL Corp given the expansion of YTL Corp’s stake in YTLE from 74% to 100%. YTLE contributes 3% of our sum-of-parts (SOP) valuation of YTL Corp pre-privatisation exercise.

We maintain “neutral” on YTL Corp, with an unchanged SOP-derived TP of RM1.50 per share. Its financial year 2016 forecast 5% dividend yield is still attractive. However, in the near term, earnings will face headwinds, especially at YTL Power International Bhd, driven by: i) a weaker pound which will impact Wessex Water Services Ltd’s earnings; and ii) overcapacity in the Singapore power sector, which will impact Power Seraya’s earnings. — MIDF Research, July 26