Cement Competition Intensifies

YTL’s PATAMI for 9MFY18 has contracted by 30.6% yoy to RM405m, and is tracking behind consensus and our expectations, accounting for only 68% of estimates. We have lowered our EPS by 8.5%-9.1% as the cement and utility business is tracking below our expectations. We revised lower our TP to RM1.05, as we input our latest value on YTLP and also lower the valuation for cement and construction operation, but maintain our HOLD call.

Competitors Cutting Price to Defend Market Share

The EBIT for the cement segment has contracted by 16% yoy, as it competitors have started lowering prices to defend their market share loss in 2QFY18. Our channel check suggests that rebates for bulk cement is at all-time high, indicating that the oversupply situation has just worsened. We have also cut our forecast and lower our valuation (from 20x to 15x PER) to reflect the current scenario. As the new government is now reviewing approved infrastructure projects, cancelling of these projects will likely worsen the overcapacity issue due to the lower demand.

Valuation Cut to Reflect Current Sentiment

Apart from lowering the valuation for the cement operation, we have also lowered the valuation for the construction sector (from 12x to 8x PER) due to the recent de-rating of the sector. Bulk of YTL’s construction order-book for the next few years is from the Gemas-JB double track and also the PDP role for the southern portion of the HSR project, where both contracts are now being reviewed by the new government with the possibility of cancellation which is creating uncertainties. Management has commented that they have not received any stop-work orders.

Maintain HOLD But With a Lower TP of RM1.05

We have lowered our EPS for FY18E-20E by 8.7%-9.1% to incorporate the weaker performance from the utilities and cement operation. We also revise downward our RNAV-based 12-month TP to RM1.05 (from RM1.40), as we lower the valuation of its core business, but maintaining our HOLD call.

Source: Affin Hwang Research - 25 May 2018