PETALING JAYA: Malayan Cement Bhd’s proposal to acquire YTL Cement Bhd’s profitable domestic operations for RM5.2 billion is an earnings-accretive exercise that will immediately enhance Malayan Cement’s revenue and profit outlook, and will transform it into a major domestic cement recovery play.
“We are positive on the rationale for this deal. The enlarged Malayan Cement offers investors exposure to a larger and more profitable cement player with focus on the medium- to longer-term recovery of the domestic cement sector. Post-acquisition, synergies (reduction in related party transactions) and operational efficiencies should be enhanced,” said CGS-CIMB Research in a report today.
It added that the enlarged operations will also benefit from economies of scale with a combined domestic market share of 60%. For YTL Corp, this is a strategic fit. Post deal, its stake in Malayan Cement will rise from 76.9% to 78.6%.
The research house said the injection of YTL Cement’s domestic assets is overall accretive, estimating an over eightfold accretion to FY22 fully diluted earnings per share (EPS) and an 18% increase in FY22 book value for the enlarged group. It retained its FY21-23F EPS estimates pending deal completion in third-quarter 21 (Q3’21).
“The proposed injection of YTL Cement’s profitable domestic operations into Malayan Cement will expedite the earnings turnaround of Malayan Cement ahead of the construction and cement sectors’ recovery and potentially unlock the value of the consolidated business.
“We turn more optimistic on Malayan Cement as a recovery play and upgrade to add, with positives from the acquisition as key share price catalysts. Our unchanged target price of RM3.26 remains,” said CGS-CIMB.
Meanwhile, MIDF Research said the acquiree companies have an aggregate revenue and profit after tax of RM1.47 billion and RM176.1 million respectively for six-month financial period ending Dec 31, 2020 and been profitable for the past three years, indicating strong operational and financial profile. The profitability was driven primarily by higher demand for cement and improved average selling prices for the period, coupled with lower cost of production. It had previously input the potential synergies arising from integration between Malayan Cement and YTL Cement.
MIDF expects this deal to further enhance operational synergies in achieving economies of scale through the consolidation of all cement and concrete businesses under Malayan Cement. It is revising its target price to RM3.18, from RM3.00 previously.
“We are positive on this deal as it could potentially bolster the group’s profitability through the acquisition of the profitable acquiree companies from YTL Cement. This is achieved through cost rationalisation and operational synergies in achieving greater economies of scale upon completion of the earnings-accretive exercise.
“We also remain sanguine on the huge improvement in the financial performance of the group in 6MFY21 which showed the bottom-line to be on brink of the break-even level. This was mainly achieved through the group’s initiative to embark on post-integration with YTL Cement.”
It added that this has made significant progression as reflected in the lower cost of sales and operating costs. This led to the group’s 6MFY21 earnings before interest and tax to be in positive territory. As such, MIDF opined that continuous effective cost synergies and the steady revenue growth trajectory will able to present an exciting earnings turnaround prospects for the group from FY21 onwards.
“Coupled with a potentially considerable domestic demand for the group’s products (cement, concrete and construction aggregates) from the continuation of mega public infra projects such as MRT3, KVDT2 and ECRL as announced in Budget 2021 and a potential domestic KL-JB HSR project, we postulate that these developments would bode well for the group’s revenue and earnings moving forward. All in, we are maintaining our buy recommendation on Malayan Cement.”
