We raise our TP for YTL Corp (YTL) to RM0.96 (from RM0.70) based on a 10% discount to its SOTP, and upgrade the stock to HOLD (from SELL). At the current share price, we believe the stock is fairly valued as the recent strength in YTL’s share price has likely fully reflected the recent recovery in cement prices. Despite factoring in higher selling prices, the incremental profit is marginal in FY20E, due to the higher financing cost arising from the debt raised for the acquisition of Malayan Cement (previously Lafarge Malaysia) at the end of FY19.

Market Consolidation Helped Drive Profitability

Although domestic demand for cement has remained soft due to the prolonged weakness in the property market, prices for bulk cement have risen to around RM240-250/MT from RM190/MT since Oct 2019, post the acquisition of Malayan Cement by YTL. The combined entity controls around 58% of the grinding capacity in Malaysia. We continue to believe that prices could move higher in the coming months as we are expecting higher demand from the construction sector. Despite the recent increase in prices, the incremental profit to YTL is minimal, due to the higher finance cost arising from the acquisition of LMC.

Gain Exposure Through Malayan Cement

We would recommend Malayan Cement (LMC MK, RM3.25, BUY) over YTL for investors seeking exposure to recovering cement prices, as Malayan Cement’s earnings are more sensitive to the movement in cement prices. Although YTL would need to pare down its current stake in MC from 77% to 75% to meet the regulation on public spread, it is unlikely for YTL to sell the shares below its acquisition price at RM3.75, as it would then have to write down the value of the goodwill arising from the acquisition, in our view. We also believe that with the recently approved related party transactions, MC can benefit from more cost synergies.

Upgrade to HOLD With a Higher SOTP-based TP of RM0.96

We upgrade YTL to HOLD (from SELL) with a higher SOTP-based TP of RM0.96 (previously RM0.70). Apart from the improving cement sector outlook, we also expect contribution from YTL’s other business segments like utilities and construction to deliver stronger earnings in FY20. However, we believe that the current valuation is fair, as it is trading at a 32.6x CY20E PER, which is around its 5-year average of 34.5x. Key risks to our call are weaker-thanexpected performance of its other operations, a price cap on bulk cement prices and non-earnings accretive acquisitions.
 

Source: Affin Hwang Research - 6 Feb 2020