PETALING JAYA: Affin Hwang Capital Research has raised its target price for YTL Corp Bhd to 96 sen from 70 sen based on a 10% discount to its sum-of-parts valuation and has upgraded the stock to a hold from a 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 financial year 2020 estimate (FY20E), due to the higher financing cost arising from the debt raised for the acquisition of Malayan Cement Bhd (previously Lafarge Malaysia) at the end of FY19, ” the research unit said in a report.
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 Lafarge Malaysia.
“We would recommend Malayan Cement 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 Malayan Cement 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, Malayan Cement can benefit from more cost synergies, ” it said.
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