Investment Highlights

• We now project FY19–21F net profits of RM2.2mil, RM221.4mil and RM215mil (from net losses of RM221.1mil, RM85mil and RM40mil previously) and upgrade our recommendation to HOLD from UNDERWEIGHT. We raise our FV to RM3.74 (based on 1.25x book value, consistent with its historical 1.25x P/B ratio during the transitional period between through and mid cycles (Exhibit 1)), from RM1.50 (based on 0.5x book value, in line with its historical 0.5x P/B ratio during the through cycle).

• YTL Cement has entered into an S&P agreement with LafargeHolcim for the acquisition of its 51% in Lafarge Malaysia for RM1.63bil cash or RM3.75/share. Following the transaction, YTL Cement is obliged to extend a mandatory offer (MO) to acquire the remaining shares (49%) in Lafarge Malaysia. YTL Cement intends to keep the listing status of Lafarge Malaysia unless it ends up with more than a 90% ownership in Lafarge Malaysia following the MO which will trigger the compulsory acquisition of the remaining shares and delisting of Lafarge Malaysia.

• At RM3.75/share, the acquisition values Lafarge Malaysia at 1.25x BV (which is consistent with its historical 1.25x P/B ratio during the transitional period between through and mid cycles). In terms of enterprise value per tonne or EV/tonne (clinker), it works out to be US$104 based on our calculation [(RM3.75 x 849.7mil shares + RM750mil net debt) / (US$/MYR of 4.13 x 9.2mil clinker tonnes)]. This is at a 12% discount to the US$118 valuation pursuant to the disposal by LafargeHolcim of its Indonesian unit Holcim Indonesia to PT Semen Indonesia in Nov 2018.

• We believe this transaction has changed the landscape of the cement sector in Peninsular Malaysia. With a commanding share of close to 60% of industry total installed clinker capacity (Exhibit 2), we believe YTL Cement has emerged the price leader that can set the price for cement in the peninsula, while its smaller competitors will just go along.

• As such, we are raising our assumptions for Lafarge Malaysia’s FY19–21F average selling prices (ASP) for cement to RM220/tonne, RM250/tonne and 250/tonne (from RM190/tonne, RM200/tonne and 210/tonne previously). The higher cement price assumptions are the key reason for our earnings upgrade as mentioned. However, we are keeping our FY19–21F assumptions for sales volumes of 6.4mil, 7mil and 7.4mil tonnes respectively.

• The outlook for the cement sector in Peninsular Malaysia will remain challenging over the medium term due to the wide gap between the local demand vs. installed capacity. We estimate that the local clinker capacity in Peninsular Malaysia now stands at 26mil, as compared with the local demand we project at only 16mil in 2019 and 17mil in 2020. However, we believe the major industry consolidation triggered by the acquisition of the top player Lafarge Malaysia by the second largest player YTL Cement will hasten the earnings recovery of the sector with the emergence of a price leader.

Source: AmInvest Research - 3 May 2019