YTL Corp (YTL) has proposed to acquire a 51% stake in Lafarge Malaysia (Lafarge) for RM1.6bn or RM3.75 per share, which translates to a 1.25x price-to-book (P/BV). We think the offer is fair. Lafarge has been in the red since 2017 and incurring negative operating cash flow since then due to stiff price competition from weak domestic cement demand and the oversupply of cement. Upgrade to HOLD with a TP of RM3.75.

Proposed Acquisition for RM3.75 Per Share

YTL has proposed to acquire a 51% equity stake in Lafarge for RM1.6bn or RM3.75 per share. This translates to a P/BV of 1.25x (based on its 4Q18 book value). Upon the completion of the deal, YTL has to extend the offer to the remaining stakeholders (49% stake) in Lafarge. YTL plans to maintain the listing status of Lafarge (assuming YTL’s stake is less than 90%).

Fair Offer

Though the proposed valuation of 1.25x P/BV is 1SD below its 5-year mean, we think that shareholders should accept the offer as it is reasonable, in our view. Lafarge has been in the red since 2017, mainly due to prolonged stiff price competition in the cement industry due to sustained lacklustre domestic cement demand and the oversupply of cement. Due to the continual losses, Lafarge has faced negative operating cash flows since then.

Market Remains Challenging in the Near to Medium Term

The consolidation may result in price stability from more rational pricing strategies and capacity cuts. The combination of YTL and Lafarge makes for a dominant player in the cement market, which controls approximately 58% of the domestic cement supply. However, we think the cement market outlook remains challenging in the near to medium term partly due to the prolonged weak property market that is plagued by affordability and high overhang issues. Currently, the domestic cement industry utilization remains low at c. 60%.

Upgrade to HOLD With a Higher TP of RM3.75

We upgrade our call to HOLD with a higher TP of RM3.75, the proposed acquisition price, on the basis that the deal will go through. If the deal is subject to the clearance of the Malaysia Competition Commission (MyCC), there is a risk that it will not be successful given the expected dominance in the cement market. Fundamentally, we do not see any immediate catalyst for a turnaround, given the prolonged weak domestic cement demand, stiff price competition.

Source: Affin Hwang Research - 3 May 2019