YTL Corp Bhd
(June 14, RM1.15)
Maintain hold with an unchanged target price (TP) of RM1.13: The acceptance period for YTL Cement Bhd’s mandatory offer (MO) for the remaining 49% stake in Lafarge closed last Thursday. Minority shareholders with a collective 26% shareholding in Lafarge accepted the RM3.75 per share offer price, raising YTL Cement’s stake in Lafarge from 51% to 77%.
The remaining 23% minority shareholders did not accept the MO. Lafarge will remain listed and would need to comply with Bursa Malaysia’s 25% minimum public spread requirement within the next three months.
In the medium term, we expect the acquisition of Lafarge to remain earnings-dilutive for YTL given Lafarge recorded losses in the first quarter of 2019 (1QFY19), in view of the still-weak cement demand and pending the potential benefits/operational synergies from the consolidation with YTL Cement.
We maintain our longer-term positive view on the takeover, as the combined estimated about 60% market share could enhance pricing power, in addition to Lafarge’s revived contract with the East Coast Rail Link. With YTL Land & Development Bhd deal likely to be completed in forecasted 4Q19, we retain our financial years 2019 (FY19F) to FY21F earnings per share.
According to the announcement, the YTL Land share swap deal would enable minority shareholders to switch to YTL Corp shares with better liquidity and more profitable/diversified exposure.
As at the first nine-month period of FY19 (9MFY19), YTL Land reported a net loss of RM56 million compared to a RM5.8 million net profit in 9MFY18 mainly due to weak property sales underpinned the challenging market conditions domestically and in Singapore.
Indicatively, imputing the surplus market value of Lafarge, given the 16% increase in its share price since the takeover offer (fuelled last Thursday talks of a potential increase in net selling prices which are currently below RM200 per tonne on average) would raise our TP four sen.
Upside risks are a recovery in cement prices despite the still-subdued industry demand outlook over the next 12 months, and faster turnaround for Lafarge. Downside risk is wider losses. — CGSCIMB Research, June 14