YTL Corporation - Panic presents opportunity

arget RM1.94 (Stock Rating: ADD)

We see the 6.9% drop in YTL's share price following its removal from the list of Shariah-compliant stocks as a big buying opportunity. YTL Power experienced a similar predicament six months ago and its share price recovered after a comparable drop. YTL's fundamentals are arguably better than YTL Power's because of the additional earnings catalysts from the cement division and the Express Rail Link extension to KLIA2. Our Add rating, FY14-16 EPS and target price (20% discount to RNAV) are maintained.

What Happened 

YTL was removed from the list of Shariah-compliant stocks by the Securities Commission. As a result, its share price fell 6.9% on Friday with 90.8m shares worth RM149m in value changing hands. 

What We Think 

YTL should have been removed from the list six months ago along with YTL Power (YTLP) since it is the holding company and has the same capital structure. The timing of the removal is unfortunate because YTL's share price prior to this had rallied over the past four weeks by 14% to reach a 52-week high. Shariah funds have likely taken this opportunity to exit although they have a one-month grace period and we believe other investors could have succumb to panic selling on Friday as well, fearing a drawn-out share overhang. The company has disclosed to us that there are no direct holdings by Islamic funds. Although it is difficult to check whether there is significant exposure by Islamic funds indirectly via local institutional holdings in the shareholder register, we believe that the worst of the selling is over, based on the YTLP example. YTLP's share price fell by 7.7% over five days after it was removed from the Shariah-compliant list. In comparison, YTLP is a more widely followed stock and 2% was directly held by Lembaga Tabung Haji. Nonetheless, YTLP recovered most of its losses in a week with the help of share buybacks (roughly half of the volume traded). YTL also has a share buyback programme in place, which last bought shares on 25 Feb at a price of RM1.61. We believe that YTL will be more active in buying back shares at current levels. 

What You Should Do 

The correction, although sharp, removes a key overhang and presents are very good buying opportunity, in our view. YTL's valuations at 10.9x FY15 PER is cheapest among the Malaysian conglomerates under our coverage.