AmInvest Research keeps buy call on Malayan Cement, FV RM3.36

Malayan Cement will acquire 12 companies involved in cement and ready-mixed concrete businesses, as well as marketing and plant management activities from its parent YTL Cement.

KUALA LUMPUR: AmInvestment Research is maintaining its buy recommendation, forecasts and fair value (FV) of RM3.36 a share for Malayan Cement (MCement) based on US$108 per clinker tonne following the corporate exercise with its parent YTL Cement.

In its research note on Monday, it said the FV (8.2 million clinker capacity x US$108 x RM4.12: US$1minus RM833mil net debt) was at a 10% discount to the replacement cost of US$120 to reflect the still challenging cement sector outlook in Peninsular Malaysia

Last Wednesday, MCement had proposed to acquire 12 companies involved in the cement and ready-mixed concrete business from YTL Cement for RM5.16bil cash consideration.

This would be satisfied via RM2bil cash; RM1.41bil via 375.5mil new Malayan Cement shares at an issue price of RM3.75/share; and 3. RM1.75bil via 466.7mil new Malayan Cement irredeemable convertible preference shares (ICPS) at an issue price of RM3.75/share (the ICPS are convertible into new MCement shares at a 1:1 ratio).

The price tag of RM5.16bil is arrived at based on an enterprise value (EV) of RM6bil for YTL Cement units (of which the basis is not explicitly stated), adjusted for RM842mil net debt sitting in their books.

“Based on our FY22F EBITDA (earnings before interest, tax, depreciation and amortisation) forecast of about RM600mil for YTL Cement units, the deal effectively values them at about 10 times EV/EBITDA, which is at a discount to MCement’s historical average EV/EBITDA of about 12 times.

“Also, based on our estimates, as YTL Cement units are projected to generate higher ROE vs. MCement, the deal, together with the ongoing private placement of 10% new shares, will enhance our FY22F EPS by about 8%, ” it said.

AmInvest Research said its estimates reflect: (1) the full dilution from the enlarged share base of 1.7 billion shares arising from the private placement and the new shares, and ICPS arising from the current deal; and (2) about RM100mil contribution at the net level from YTL Cement units based on our estimates; and(3) interest savings from proceeds of the private placement.

It also pointed out that based on its estimates, following the two corporate exercises, MCement’s net debt and gearing will increase from RM793mil and 0.35 times as at end-Dec 2020 to RM3.4bil and 0.6 times respectively.

Post-exercises, AmInvest Research said it was more inclined to value the new entirety via an earnings-based valuation method (vs. asset based currently), given that it shall emerge a more profitable company. Our FV shall increase slightly to RM3.48 (from RM3.36 currently).

The basis of our potential revised FV is an EV/EBITDA of 12x, an estimated consolidated EBITDA of RM800mil in FY22F, a net debt of RM3.4bil and an enlarged share cap of 1.78bil.

“We maintain our view that the worst is behind the cement sector in Peninsular Malaysia following the recent sector consolidation, resulting in more rational competition amongst players. However, the recovery will be gradual given the still weak outlook for its two main consuming industries, i.e. property and construction, weighed down further by the lingering pandemic.

“At its current share price, the market is effectively valuing MCement at about 20% discount to its replacement cost (based on the replacement cost for clinker capacity of US$120/tonne), which we believe is unjustified.

“For now, we value MCement at a 10% discount to replacement cost, which we believe is appropriate, ” AmInvest Research said.

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