THE purported RM5.2 bil move by Malayan Cement Bhd to acquire 12 subsidiaries owned by YTL Cement Bhd has been hailed as long-term positive to facilitate further extraction of cost synergies.
According to Hong Leong Investment Bank (HLIB) Research, the exercise allows YTL to consolidate its cement and ready-mixed concrete operations under MCement.
Chief among the assets to be acquired are three integrated cement plants held under Pahang Cement, Perak-Hanjoong and Straits Cement.
“Post-exercise, MCement would command an estimated 60%-65% of cement production in Peninsular Malaysia,” justified HLIB’s head of research Jeremy Goh.
“This, in our view would facilitate further extraction of synergies through rationalisation and streamlining of operations by removing cost duplication, enhancing economies of scale as well as aid strategy synchronisation.”
Additionally, the research house foresees minimal integration hiccups between MCement and YTL Cement given the similarity of their businesses.
“Perhaps, a significant reduction in recurrent RPTs (related party transaction) between YTL Cement and MCement would also pique market interest,” added HLIB Research.
To re-cap, post the said acquisition exercise, YTL Cement’s stake in MCement should rise to 78.58% from 76.98%, hence warranting MCement to apply for lower public shareholding spread of 20%.
The transaction which will be satisfied via cash, issuance of shares and irredeemable convertible preference shares (ICPS) is conditional upon MCement’s completion of placement announced earlier and shareholders’ approval while completion is targeted by 3Q CY2021.
All-in-all, HLIB Research has upgraded MCement to “buy” (from “hold” previously) with a higher target price of RM3.60 (from RM3.04 previously).
“Overall, we are positive on the stock given the injection of profitable assets should put MCement on a faster track to profitability with upside from further unlocking of synergies,” projected the research house.
“While near term outlook remains opaque, we believe the stock presents an attractive long term value proposition. The downside risks include higher interest costs, political fluidity, prolong COVID-19 and coal prices.”
Against the backdrop of positivity, CGS-CIMB also upgraded MCement to “add” (from hold previously) but with an unchanged target price of RM3.26.
“The proposed injection of YTL Cement’s profitable domestic operations into MCement will expedite the earnings turnaround of MCement ahead of the construction and cement sectors’ recovery and potentially unlock the value of the consolidated business,” opined analyst Sharizan Rosely.
“We turn more optimistic on MCement as a recovery play with positives from the acquisition as key share price catalysts.”
At 9.54am, MCement was up 2 sen or 0.71% to RM2.82 with 166,400 shares traded, thus valuing the company at RM2.4 bil. – May 17, 2021
