Yesterday, YTL proposed to acquire 51% in LAFMSIA for RM3.75/share from AICL. Subsequently, they also proposed a MGO at the same price for all the remaining shares from minority shareholders. We believe that this is a golden opportunity for investors to exit their investments in LAFMSIA regardless of MGO exercise, due to the limited upside (+RM0.03) to the offer price of RM3.75/share and 103%/95% premium to our and consensus TP of RM1.85/RM1.92. At the same time, we also take this opportunity to cease coverage on the stock.

New owner. Yesterday, YTL proposed to acquire 51% in LAFMSIA for RM3.75/share from Associated International Cement Limited (AICL). Subsequently, they also proposed a mandatory take-over offer (MGO) at the same price for all the remaining shares from minority shareholders.

A generous offer. We view the offer price of RM3.75/share from YTL for the 51% stake in LAFMSIA as generous, especially when LAFMSIA has been loss-making since 2017, expected to continue until FY20 due to intense competition. The offer price implies FY19E Price-to-Book of 1.41x which is just slightly higher than the -1.0SD level to its 5-year mean (trough level is at 0.6x which is at 5-year -2SD level), a whopping 41% premium to our estimated book value/share of RM2.66. That aside, it also represents 103%/95% premium to our/consensus Target Price for LAFMSIA.

FY19 outlook. We remain cautious over the overall group’s outlook in 2019 due to weak domestic demand woes and continuous overcapacity in the market leading to stiff competition and cement rebates wars. The group’s export strategy may partially help to drive revenue but given generally low margins from export sales, we do not expect any immediate significant bottom-line improvements.

Opportunity to exit. While YTL is expected to follow up with a MGO (Mandatory General Offer) to minority shareholders after acquiring 51% stake in LAFMSIA, we believe that this would be a golden opportunity for investors to exit their investment in LAFMSIA, regardless of MGO exercise from YTL. This is mainly because LAFMSIA’s share price has surged 12.7% to RM3.72, only RM0.03 short from YTL’s generous offer, limiting further upside.

Ceasing coverage. As such, we take the opportunity to cease coverage on LAFMSIA, as we previously had an UNDERPERFORM call with a much lower Target Price of RM1.85, based on a Fwd. PBV valuation of 0.70x on FY19E BV/share of RM2.66.

Source: Kenanga Research - 3 May 2019