Investment Highlights
 

• We maintain our FY19F forecast but project steeper net losses of RM102mil and RM70.9mil for FY20-21F (vs. net losses of RM50.4mil and RM14.0mil previously), reduce our FV by 8% to RM3.33 (from RM3.61 previously) as we now value the company based on US$96 per clinker tonne (9.2mil clinker capacity x US$96 x RM4.22:US$1 minus RM895mil net debt), at 20% discount to the replacement cost of US$120 to reflect the still challenging cement sector outlook in Peninsular Malaysia. Maintain HOLD.
• Lafarge Malaysia’s minority shareholders yesterday shot down proposed RM3.5bil related party transactions (RPT) between Lafarge Malaysia and YTL Cement during an extraordinary general meeting (EGM). The RPT would have allowed Lafarge and YTL Cement to derive synergies in terms of bulk sourcing of raw materials and sharing of land use, logistics and even office premises, etc.
• We previously assumed that these synergies would enhance earnings to the tune of 2% of turnover. We are removing this from our forecasts.

• We also believe the latest development could pave the way for a more immediate merger exercise between YTL Cement and Lafarge Malaysia (to drive these synergies).

• Meanwhile, we maintain the following: (1) cement average selling price (ASP) of RM190/tonne for FY19–21 and; (2) FY19–21F sales volume of 6.2mil, 7mil and 7.2mil 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 tonnes, as compared with our projected local demand at only 15mil tonnes in 2019 and 16mil tonnes in 2020 (Exhibit 2). However, the takeover of Lafarge Malaysia by YTL cement resulting in the merged entity’s control of about 60% of the cement market in Peninslar Malaysia (Exhibit 1), should bring about reduced competition and hence greater pricing power for the producers over time

Source: AmInvest Research - 24 Sept 2019