• Malayan Cement (MCEMENT) has proposed to acquire YTL Cement’s cement and ready-mixed concrete business in Malaysia for a total purchase consideration of RM5.16bn, payable by a combination of cash, issuance of new shares and irredeemable convertible preference shares (ICPS)
• We are neutral on the deal as the consolidation, which would streamline both companies’ operations and enhance synergies, had been anticipated
• We believe the acquisition price is reasonable given that the acquiree companies are profitable and based on a proforma PER of 14.6x, which is at a discount to regional peers’ average CY20 PER of 21x

MCEMENT Proposed to Acquire YTL Cement’s Malaysian Core Operations

MCEMENT entered into a conditional share sale and purchase agreement (SSPA) with YTL Cement for the proposed acquisition of YTL Cement’s entire Malaysian operations for a purchase consideration totalling RM5.16bn. The acquisition will be funded by (i) RM2bn in cash, (ii) RM1.4bn through the issuance of 375.5m new ordinary shares at an issue price of RM3.75 and (iii) RM1.75bn through the issuance of 466.7m new ICPS in MCEMENT at an issue price of RM3.75. We view the consolidation as a natural step forward for the company as it would streamline business operations and significantly reduce recurrent related-party transactions between MCEMENT and YTL Cement.

A Fair Deal, in Our View

We believe the deal is fair. Although the acquisition P/BV of 2.95x (based on the RM5.16bn purchase price) is at a premium to our valuation of RM2.6bn (P/BV of 1.5x), we believe the valuation is justified given the proforma PER of 14.6x (based on the annualised 6M FPE 2020 proforma net profit of YTL Cement’s acquiree companies), which is at a discount to regional peers’ average CY20 PER of 21x.

Maintain HOLD With a Higher Target Price of RM2.95

All in, we are neutral on the proposed acquisition as it was anticipated and a natural step forward in streamlining the two entity’s operations. We maintain our HOLD call on Malayan Cement while raising our 12-month target price to RM2.95 (from RM2.55) by applying a higher FY21E P/BV of 1.1x (0.95x previously), now based on -1SD (previously -1.5SD) below its past-10-year mean P/BV; supported by expectations of cement demand recovery driven by the revival of mega infrastructure projects.

Source: Affin Hwang Research - 17 May 2021