MCement has announced acquisition of 12 subsidiaries owned by YTL Cement for a purchase price of RM5.2bn to be satisfied via cash, issuance of shares and ICPS. Target completion by 3QCY21. We are long term positive as this would facilitate further extraction of cost synergies. MCement’ FY22f EPS could be lifted by 16%. Maintain forecasts. Upgrade to BUY with higher TP of RM3.60 after raising our target P/B multiple to 1.3x based on c.20% discount to 10 year P/B average. We turn positive on the stock especially since the injection of profitable assets should put MCement on a faster track to profitability. Downside risks: higher interest rate, political fluidity, prolonged Covid-19 and coal prices.

NEWSBREAK

MCement announced an acquisition of twelve subsidiary companies owned by YTL Cement Berhad for a consideration sum of RM5.2bn. Purchase consideration will be satisfied via cash, issuance of shares and ICPS (Fig 1). Post-exercise, YTL Cement’s stake in MCement should rise from 76.98% to 78.58%. Thereafter, MCement would apply for lower public shareholding spread of 20%. Transaction is conditional upon MCement’s completion of placement announced earlier and shareholders’ approval. Completion is targeted by 3QCY21.

HLIB’s VIEW

Under one roof. We are long term positive on this deal given that it allows YTL to consolidate its cement and ready-mixed concrete operations under MCement. Chief among the assets to be acquired are three integrated cement plants held under Pahang Cement, Perak-Hanjoong and Straits Cement. Post-exercise, MCement would command an estimated 60-65% of cement production in Peninsular Malaysia. This, in our view would facilitate further extraction of synergies through rationalisation and streamlining of operations by removing cost duplication, enhancing economies of scale as well as aid strategy synchronisation. Additionally, we see minimal integration hiccups given similar business. Perhaps, a significant reduction in recurrent RPTs between YTL Cement and MCement would also pique market interest.

Consideration. The purchase price of RM5.2bn would be satisfied by: (1) cash of RM2bn; (2) issuance of 376m MCement shares at RM3.75; 34% premium to last closing price and (3) issuance of 467m of ICPS at RM3.75. Recall that in 2019, YTL Cement bought a 76.98% stake in MCement at RM3.75 per share. Potential further dilution from conversion of ICPS seems remote given that: (1) violates MCement’s public shareholding spread and (2) is out of the money. Hence, apart from rights to dividends the ICPS bears little economic value. The purchase price implies an estimated trailing CY20 P/E of 22x and P/B of 2.9x (as at Dec-20) coinciding with MCement’s P/B trading range from 2013-16 (last profitable 2016). Note that target assets have been profitable throughout their operating history.

Financial implications. Based on our estimates, the transaction would ultimately increase our FY22f EPS forecasts for MCement by 15.7% with no ICPS conversion (Fig 4). Note that we have conservatively assumed acquiree companies achieve similar performance with FY20 (Fig 3). Post-acquisition, gearing could increase to 0.73x mainly due to debt undertaking meant to suffice its cash purchase portion. In terms of dilution, a 10% stake would be reduced to 6.5% assuming no ICPS conversion.

Forecast. Unchanged pending completion of placement acquisition exercises.

Upgrade to BUY, TP: RM3.60. Upgrade to BUY with higher TP of RM3.60 (from RM3.04). Our TP increases after raising our target P/B multiple to 1.3x (from 1.1x) based on c.20% discount to 10 year P/B average. Overall, we are positive on the stock especially since the injection of profitable assets should put MCement on a faster track to profitability with upside from further unlocking of synergies. While near term outlook remains opaque, we believe the stock presents an attractive long term value proposition. Downside risks: higher interest costs, political fluidity, prolonged Covid-19 and coal prices.

Source: Hong Leong Investment Bank Research - 17 May 2021