YTL purchase of Lafarge strategically positive, says CIMB Research

YTL Corp subsidiary YTL Cement

KUALA LUMPUR: YTL Corp subsidiary YTL Cement’s offer to acquire LafargeHolcim Ltd’s 51% stake in Lafarge Malaysia for RM1.6bil cash (RM3.75 a share) is strategically positive but poses immediate earnings dilution, CIMB Equities Research says.

“We are longer-term positive on the strategic rationale of the deal as YTL Cement will become the dominant player with an estimated combined domestic market share of 70%. 

“However, we are medium-term negative given the earnings impact,” it said. 

As at end-FY18, Lafarge’s net loss widened to RM319.4mil from RM215.2mil in FY17 due to 1) oversupply, 2) weak demand, 3) competitive pricing, and 4) high operating cost. 

This compares to YTL Cement’s FY6/18 pretax profit of RM169.2mil and RM90mil in 1H6/19 or 16% of YTL Corp’s total group earnings. 

Commenting on the deal, CIMB Research said it comes with a mandatory offer (MO) to acquire the remaining 49% stake. 

Valuation is a 19%-47% premium over Lafarge’s five-day to three-month volume weighted average price (VWAP) but at less than 1% upside to the closing price. 

“It implies 1.25 times Lafarge’s FY18 book value, which we deem as fair considering Lafarge’s prolonged losses and the overall subdued cement market conditions,” it said.   

CIMB Research said based on the proforma impact on YTL Corp’s balance sheet from the proposed acquisition and including Lafarge’s RM834.7mil debt as at end-FY18, the group estimates that gross gearing will increase from 1.53 times as at end-FY6/18 to 1.7 times post takeover of the 51% stake before rising further to 1.81 times, assuming full acceptance of the mandatory offer.

The research house pointed out that given the earnings-dilutive impact on YTL’s earnings, this deal is likely to pose a  medium-term overhang on its share price. 
“Pending greater clarity on a potential new turnaround strategy for Lafarge, we retain Hold and TP (30% RNAV discount). 

“From an industry perspective, consolidating YTL Cement and Lafarge’s operations may somewhat raise the pricing power of the combined entity but does not alter the oversupplied state of the cement market, in our view. 

“Upside risk is a significant recovery in overall cement demand, which will accelerate a turnaround for Lafarge and lead to swifter synergies for YTL. A downside risk is prolonged weak cement demand,” it said.