Win-win concrete deal

PETALING JAYA: The Malayan Cement Bhd-YTL Cement Bhd deal will potentially bolster Malayan Cement’s earnings while unlocking value for YTL Cement’s business.

This, against a backdrop of an improving cement sector, has prompted analysts to upgrade their calls on the companies.

Malayan Cement recently announced that it plans to buy the entire equity interest of YTL Cement’s companies and their subsidiaries which are involved in cement and ready-mixed concrete operations for RM5.16bil.

This will be satisfied via a combination of cash, new share issuances and new irredeemable convertible preference shares. However, the deal is subjected to shareholders’ approval.

In its report, MIDF Research which upgraded its call to “buy” for YTL Corp Bhd, which is YTL Cement’s parent company, and maintained its “buy” call for Malayan Cement, said the development is a positive for YTL Cement in that it potentially unlocks value in its businesses.

“Other potential catalysts include the YTL group’s 45%-owned 554MW shale-fired power plant which is due to come on-stream soon although we think YTL Power Bhd is a more leveraged play into this, ” it told clients.

In the report, MIDF pointed out that a valuation of RM5.16bil effectively values YTL Cement’s businesses at an estimated 14.7 times its FY21 earnings.

“More importantly, post-consolidation, we see potential value enhancement considering that Malayan Cement trades at one time its FY21 price to book value, which is a 69% premium against YTL’s group-wide price to book value of 0.6 times, ” it said.

Malayan CementMalayan Cement

For Malayan Cement, MIDF said the asset rationalisation exercise was a step further for the group to achieve greater operational synergies which could improve the financial performance of the group moving forward.

The acquiree companies have an aggregate revenue and profit after tax of RM1.47bil and RM176.1mil respectively for the six-month financial period ending Dec 31,2020 and have been profitable for the past three years, indicating a strong operational and financial profile, it pointed out.

“The profitability has been driven primarily by the higher demand for cement and improved average selling prices, coupled with lower costs of production.”

MIDF said it believes that continuous effective cost synergies and a steady revenue growth trajectory will be able to result in “exciting” earnings turnaround prospects for the group from FY21 onwards.

“Coupled with a potentially considerable domestic demand for the group’s products such as cement, concrete and construction aggregates from the continuation of mega public infra projects, we postulate that these developments would bode well for the group’s revenue and earnings moving forward, ” the research outfit said.

Likewise, in its report on Malayan Cement, AmInvestment Bank’s research unit said “post-exercise, we are more inclined to value the new entirety via an earnings-based valuation method versus the asset-based method currently used, given that it shall emerge a more profitable company.”

It maintained its view that the worst was behind the cement sector in Peninsular Malaysia.

AmInvestment, however, warned that the recovery in the cement sector will be gradual given the still weak outlook for its two main consuming industries, namely property and construction, which are still being weighed down by the lingering Covid-19 pandemic.

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