INVESTMENT HIGHLIGHT

• YTL acquiring controlling stake in Lafarge Malaysia

• Effectively corners cement market with ~60% share

• Eyeing pricing power improvement, cost synergies

• Valuation of deal at discount to PT Semen’s acquisition of PT Holcim Indonesia

• Neutral call maintained at unchanged TP of RM1.15 for now

Acquiring controlling stake in Lafarge. YTL has entered into an agreement to acquire a 51% stake in Malaysia’s largest cement manufacturer, Lafarge Malaysia Cement Bhd (Lafarge) from Associated International Cement Ltd (AIC) for RM1.6b (RM3.75/share). Upon completion, YTL will also make a mandatory offer for the remaining Lafarge shares at the same RM3.75/share price tag. The deal values Lafarge at an estimated EV of RM3.9b (USD949m). Lafarge is currently loss making, registering FY18 LBITDA of RM189m and FY18 net loss of RM319m.

Cheaper than PT Holcim Indonesia deal. Lafarge has been reported to be looking to divest its stake in its South East Asian businesses since 2018, with the latest deal (prior to this one) being the sale of its controlling stake in PT Holcim Indonesia. LafargeHolcim sold its 80.6% stake in PT Holcim Indonesia to PT Semen Indonesia for an EV of USD1.8b in Nov18. This valued PT Holcim at an EV/tonne of USD118 – PT Holcim is the 3rd largest player in Indonesia. YTL’s deal for Lafarge (which is the largest player in Malaysia) is relatively cheaper at an estimated USD103/tonne and is lower than replacement cost of USD125- 130/tonne. At 1.25x, the deal values Lafarge at the lower end of its midcycle PBV. Valuation wise, this seems like a pretty good deal.

Immediate-term implications. However, consolidation of a 51% interest in Lafarge is estimated to shave off RM163m off YTL’s net profit or 32% of YTL' FY19F earnings. However, cash cost of the acquisition of RM1.6b is just 13% of YTL’s gross cash. Given Lafarge’s much lower net gearing (of 30%), YTL’s overall group net gearing upon consolidation is estimated to reduce slightly from 2.4x pre-acquisition to 2.2x, while shareholder’s funds is estimated to expand 17%.

Cornering the market. More importantly, post-acquisition, YTL will be the dominant cement player in Malaysia controlling ~60% of the market. LMC controls ~40% of the industry while YTL is the 2nd largest player with a ~20% share. Such significant consolidation could perhaps catalyse a much needed improvement in pricing power and reduce excessive competition in the industry. This could be the immediate-term benefit from the acquisition. On top of this, YTL is looking to derive cost synergies from: (1) Operational efficiencies in logistics, distribution and procurement, (2) Economies of scale, (3) Reduction or elimination of duplicated functions (4) Consolidation of corporate overheads. YTL has solid balance sheet backing and should be able to see through an estimated 3 years’ timeline to fully rationalise the acquisition.

Source: MIDF Research - 3 May 2019