INVESTMENT HIGHLIGHTS

• Proposed takeover offer at RM3.75 per share

• Listing status likely to remain for now

• Opportunity to realize at an attractive premium

• Recommend to accept the offer

Acquiring stake at RM3.75/share. YTL Cement Berhad (“YTL Cement”) has entered into a sale and purchase of shares agreement on 2nd May 2019 with Associated International Cement Limited to acquire 433.3m ordinary shares of Lafarge Malaysia Berhad (“Lafarge Malaysia”) already owned by the latter. The transfer of shares agreed equates to 51% equity stakes in Lafarge Malaysia, which would grant YTL Cement a controlling stake in Malaysia’s biggest cement producer.

Pursuant to the agreement, a mandatory offer was extended for the proposed acquisition of remaining Lafarge Malaysia shares not already owned by the offeror at RM3.75/unit. We noted that the offer price represents 14% premium over the last traded price as at 30th April 2019. The listing status of Lafarge Malaysia will remain, unless the public spread requirements are no longer met. In recognition of this, the listing status is largely dependent on the acceptance rate of its mandatory take-over offer.

Valuation. From shareholders perspective, we believe the offer is appealing. As of 30th April 2019, the offer price carries an approximately 14% premium to its last traded price. Meanwhile, our valuation on Lafarge Malaysia was derived from PBV multiples of 0.6x, leaving us with a TP of RM1.60. By extension, the current take-over price constitute about >100% premium to our valuation.

YTL Cement to have controlling stake. At 1.4x PBV, we believe the offer price is reasonable. Historically, Lafarge Malaysia has held a significant share in cement supplies locally which amounted to 40% of the total consumption, in comparison to YTL Cement at 30%. In a broader sense, the acquisition of Lafarge Malaysia will grant YTL Cement a significantly bigger market share of 70%, granting YTL Cement more control over the industry supplies. Consequently, this could be positive for the industry that is currently plagued by overcapacity and overly competitive pricing issue

Operating environment to stay challenging. Nevertheless, we believe that cement producers will continue to operate in challenging environment in the near term. This stemmed from the higher cost of production that is partly attributable to higher energy costs. It is notable that electricity represents approximately 20% of total production costs. This was further exacerbated by oversupply issues, which have caused irrational pricing environment among cement producers. To illustrate, we learned that there are about eight cement manufacturers across Malaysia with a total estimated capacity of 40.2m MT. Considering that total consumption is expected to range below 20m MT/ year in the immediate term, we believe it is going to be a challenging time for the industry until demand eventually picks up again.

Accept offer. Our TP for Lafarge Malaysia is at RM1.60 per share which premised on FY20 BVPS pegged to PBV of 0.6x. YTL Cement’s offer price of RM3.75 per share represents an attractive premium of >100% over our last TP. Accordingly, it represents a PBV multiple of 1.4x to our FY20 BVPS. In light of our positive view on the acquisition, we recommend the offeree to accept the offer.

Source: MIDF Research - 3 May 2019