YTL Corp has agreed to acquire Lafarge Holcim's entire 51% stake in Lafarge Malaysia for US$396mil (RM1.63bn). This has in turn, triggered a MGO for the remaining 49% shares. The offer price of RM3.75 represents 1.25x P/B and EV/tonne of USD104/tonne. We opine that the price is fair given local cement EV/tonne valuations of USD100. The consolidation of industry players in this oligopolistic market may result in improved pricing power, but this may take time to come to fruition. No change to our forecast. Those with a short term investment horizon should consider accepting the MGO. However, investors with a longer term horizon may consider holding on to the stock for the potential benefits of possible pricing improvement and operational rationalisation. Upgrade from Sell to HOLD with RM3.75 TP.

NEWSBREAK

YTL Corp (non-rated) has entered into a sale and purchase agreement to acquire a 51% stake in Lafarge Malaysia from Lafarge Holcim Ltd for RM1.63bn (or RM3.75 per share). This has in turn triggered a mandatory general offer (MGO) for the remaining 49% Lafarge Malaysia shares. In the announcement, YTL Corp intends to maintain the listing status of Lafarge Malaysia. The acquisition is expected to complete by 3Q19.

HLIB’s VIEW

Inline with parent-co’s strategy. We note that Lafarge Holcim Ltd (a parent company to Lafarge) been disposing its assets in the Southeast Asia region, which includes, PT Lafarge Holcim Indonesia and Holcim Philippine Inc.

Valuation wise. The price tag of RM1.62bn (for a 51% stake in Lafarge Malaysia) translates to a P/B of 1.25x. Using the EV/tonne valuation method, the offer price of RM3.75 would translate into EV/tonne of USD104 which we deem fair as it is in line with the industry’s replacement cost

Largest market share. Post transaction, the combined YTL and Lafarge clinker capacity will rise significantly to 12.1m tonnes annually and rake the biggest market share in the cement industry at 59%. The consolidation of industry players in this oligopolistic market may result in improved pricing power, although this may take some time to come to fruition.

Forecast. No changes. At this current juncture, there lacks clarity on what plans YTL has for Lafarge operationally.

Upgrade to HOLD with TP of RM3.75. Despite the limited upside from the current price, we advise those with a short term investment horizon to accept the MGO as an exit strategy as it may take some time to see improvements in pricing and operational rationalisation (Lafarge’s plants are old and run on a relatively high cost structure). On the flipside, those with a longer term investment horizon (i.e. say beyond FY20) may consider holding on to the stock for the potential benefits of possible improved pricing power and operational rationalisation to improve efficiency (although this is still difficult to quantify at this juncture). We upgrade our rating on Lafarge from Sell to HOLD with TP of RM3.75, reflecting the MGO price.

Source: Hong Leong Investment Bank Research - 3 May 2019