YTL buys Lafarge: Game changer or time to exit?

PETALING JAYA: AllianceDBS Research has advised investors not to accept the offer by YTL Corp Bhd to acquire a 51% stake in Lafarge Bhd at RM3.75 a share as it believes that Lafarge could fetch higher valuations if it remains listed, on the back of improved outlook for the cement industry.

“We expect cement demand to recover with the revival of several major infrastructure projects and this should help support prices,“ the research house said in a report last Friday.

Several key projects such as the East Coast Rail Link, , Klang Valley Double Tracking Project and Penang Transport Master Plan have recently been revived. As a result, AlianceDBS expects cement demand to improve, projecting a growth of 10% (FY19), 5% (FY20) and 5% (FY21).

In contrast, Kenanga Research believes that this is a golden opportunity for investors to exit their investments in Lafarge regardless of a mandatory general offer exercise, due to the limited upside (+3 sen) to the offer price of RM3.75/share and 103% / 95% premium to its and consensus target price of RM1.85/RM1.92.

“We view the offer price of RM3.75/share from YTL for the 51% stake in Lafarge as generous, especially when Lafarge has been loss-making since 2017, and expected to continue until FY20 due to intense competition,“ the research house said.

“We remain cautious over the overall group’s outlook in 2019 due to weak domestic demand woes and continuous overcapacity in the market leading to stiff competition and cement rebates wars. The group’s export strategy may partially help to drive revenue but given generally low margins from export sales, we do not expect any immediate significant bottom-line improvements,“ it added.

AllianceDBS is positive on YTL Cement Sdn Bhd’s acquisition as this would improve industry dynamics that have been pressured by intense price competition and sluggish demand over the past few years. YTL Cement and Lafarge will have a combined of about 60%, which would lead to better pricing power.

“We do not discount the possibility of YTL Corp injecting YTL Cement into Lafarge in the future, given that YTL Cement intends to keep Lafarge’s listing status (unless it receives acceptance level of more than 90%). This could create greater shareholder value,“ said AllianceDBS.

It expects the stock to trade close to the RM3.75 offer price in the near term. Assuming the stock is valued at its three-year forward price-to-book value mean (of 1.7 times book value), it would imply a RM4.55 value/share for Lafarge.

Lafarge’s closed unchanged at RM3.72 last Friday.

Source: The Sun Daily

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