• YTL Corp (YTL) announced that it will be disposing its cement operation to Malayan Cement (MCB) for a total consideration of RM5,158.1m. MCB will make the payment partly in cash and shares
• Overall we believe that deal is positive to YTL shareholders, as it would eliminate concerns about related-party transactions (RPT) and could drive better synergies across its cement operations
• The disposal price is also higher than the value we ascribed to YTL’s cement operations, as we currently value it at around RM2.6bn, which is based on 1.5x its book value

The Disposal Required to Drive Better Value for Both YTL and MCB

We are positive on the deal, as it would help to address the RPT problem with MCB (LMC MK, RM2.80, Hold), as post the disposal, all cement operations of both YTL and MCB are parked under a single entity. We believe it would also help to drive the synergies that YTL’s management had previously envisaged, but failed to fully materialise due to several concerns raised by minority shareholders of MCB. Apart from that, the disposal also helps to drive better value for YTL, as its cement operations is valued at RM5.1bn (or 2.95x P/BV), which is higher than our valuation of RM2.6bn (or 1.5x P/BV).

Offering the Same Deal to LMC Minority Shareholders

The sale consideration will be satisfied via a combination of cash (RM2bn), new ordinary shares in MCB (RM1.48bn) and new irredeemable convertible preference shares or ICPS (RM1.75bn) in MCB. Both the new shares and ICPS will be issued at RM3.75 each, which is higher than its current market price, but is similar to the MGO price that YTL offered to Lafarge Malaysia’s minority shareholders in 2019. We believe that by offering a similar price to MCB’s minority shareholders, there is a high possibility the deal would get through. The price is also higher than the recently proposed private placement by MCB, which is expected to be at a 10% discount to the current market price.

Maintained HOLD With An Unchanged TP at RM0.67

Despite holding a positive view on the deal, we are maintaining our HOLD call with an unchanged TP at RM0.67, as we believe it will still take another 1-2 years before cement demand recovers. Its hospitality-related operations also continue to be negatively impacted by the recent resurgence of Covid19 cases around the world and in Malaysia, which will no doubt cap the upside potential of YTL’s share price. Key upside/downside risks: stronger/weaker-than-expected recovery in the hospitality segment.

Source: Affin Hwang Research - 17 May 2021