KUALA LUMPUR: Affin Hwang Capital Research raised its target price for YTL Corp (YTL) to 96 sen from 70 sen based on a 10% discount to its sum-of-parts and upgrade the stock to Hold (from Sell).
“At the current share price, we believe the stock is fairly valued as the recent strength in YTL’s share price has likely fully reflected the recent recovery in cement prices.
“Despite factoring in higher selling prices, the incremental profit is marginal in FY20E, due to the higher financing cost arising from the debt raised for the acquisition of Malayan Cement (previously Lafarge Malaysia) at the end of FY19, ” it said on Thursday.
Affin Hwang Research pointed out that although domestic demand for cement has remained soft due to the prolonged weakness in the property market, prices for bulk cement have risen to around RM240 to RM250 a tonne from RM190 since October 2019, post the acquisition of Malayan Cement by YTL.
The combined entity controls around 58% of the grinding capacity in Malaysia.
The research house continues to believe that prices could move higher in the coming months as it expects higher demand from the construction sector.
Despite the recent increase in prices, the incremental profit to YTL is minimal, due to the higher finance cost arising from the acquisition of LMC.
“We would recommend Malayan Cement (LMC MK, RM3.25, BUY) over YTL for investors seeking exposure to recovering cement prices, as Malayan Cement’s earnings are more sensitive to the movement in cement prices.
“Although YTL would need to pare down its current stake in MC from 77% to 75% to meet the regulation on public spread, it is unlikely for YTL to sell the shares below its acquisition price at RM3.75, as it would then have to write down the value of the goodwill arising from the acquisition, in our view.
“We also believe that with the recently approved related party transactions, MC can benefit from more cost synergies, ” it said.
Affin Hwang Research said apart from the improving cement sector outlook, it also expects contribution from YTL’s other business segments like utilities and construction to deliver stronger earnings in FY20.
However, it believes that the current valuation is fair, as it is trading at a 32.6 times CY20E PER, which is around its five-year average of 34.5 times. Key risks to its call are weaker-than-expected performance of its other operations, a price cap on bulk cement prices and non-earnings accretive acquisitions.
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