This article first appeared in The Edge Financial Daily on February 7, 2020
YTL Corp Bhd
(Feb 6, 94.5 sen)
Upgrade to hold with a higher target price of 96 sen: Although domestic demand for cement has remained soft due to the prolonged weakness in the property market, prices of bulk cement have risen to around RM240 to RM250 per tonne from RM190 per tonne since October 2019 post the acquisition of Malayan Cement Bhd (previously Lafarge Malaysia Bhd) by YTL Corp Bhd.
The combined entity controls around 58% of the grinding capacity of Malaysia. We continue to believe that prices could move higher in the coming months as we expect higher demand from the construction sector. Despite the recent increase in prices, incremental profit for YTL Corp is minimal due to higher finance cost arising from the acquisition of Malayan Cement.
For investors seeking exposure to recovering cement prices, we would recommend Malayan Cement over YTL Corp as the former’s earnings are more sensitive to movements in cement prices.
Although YTL Corp 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 of YTL Corp to sell the shares below its acquisition price of 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.
Apart from an improving cement sector outlook, we also expect contributions from YTL Corp’s other business segments like utilities and construction to deliver stronger earnings for the financial year ending June 30, 2020 (FY20).
However, we believe that the current valuation is fair as it is trading at 32.6 times calendar year 2020 estimated price-earnings ratio, which is around its five-year average of 34.5 times.
Key risks to our call include weaker-than-expected performances of its other operations, a price cap on bulk cement prices and non-earnings-accretive acquisitions. — Affin Hwang Capital, Feb 6