KUALA LUMPUR, May 17 — The Malayan Cement Bhd’s proposed acquisition of 12 companies involved in cement and ready-mixed concrete businesses in Malaysia for RM5.16 billion from its parent company, YTL Cement Bhd, can potentially bolster the company’s profitability.
In a research note today, MIDF Amanah Investment Bank Bhd (MIDF) said this could be achieved through cost rationalisation and operational synergies in achieving greater economies of scale upon completion of the earnings-accretive exercise.
Malayan Cement is 76.98 per cent-owned by YTL Cement.
The investment bank said it also remained sanguine on the huge improvement in the company’s financial performance in the six-month period of the financial year 2021 (FY21), which showed that the company’s bottom-line to be on brink of the break-even level.
“This was mainly achieved through the company’s initiative to embark on post-integration with YTL Cement. This has made significant progression as reflected in the lower cost of sales and operating costs,” it said.
Therefore, MIDF said the continuous effective cost synergies and steady revenue growth trajectory would be able to present exciting earnings turnaround prospects for the company from FY21 onwards.
As such, MIDF has maintained its “buy” call on Malayan Cement, raising its target price (TP) for the company’s shares higher at RM3.18 from RM3 previously.
Meanwhile, AmInvestment Bank Bhd said based on its estimation, the proposed acquisition would enhance Malayan Cement’s FY22 earning per share (EPS) forecast by about eight per cent as YTL Cement units are projected to generate higher return on equity.
It said the estimation mainly reflected the full dilution from the enlarged share base of 1.7 billion shares arising from the private placement and the new shares and irredeemable convertible preference shares arising from the current deal, among others.
“Also, based on our estimates following the two corporate exercises, Malayan Cement’s net debt and gearing will increase from RM793 million and 0.35x as at end-Dec 2020 to RM3.4 billion and 0.6x respectively,” it said.
Post-exercise, AmInvestment Bank said it is more inclined to value the new entirety via an earnings-based valuation method, given that it shall emerge as a more profitable company.
“Our fair value (FV) shall increase slightly to RM3.48 (from RM3.36 currently).
“The basis of our potential revised FV is an EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortisation ratio) of 12x, an estimated consolidated EBITDA of RM800 million in FY22, a net debt of RM3.4 billion and an enlarged share cap of 1.78 billion,” it said.
The investment bank said it also maintained its view that the worst is behind the cement sector in Peninsular Malaysia following the recent sector consolidation, resulting in more rational competition amongst players.
However, it said recovery would be gradual, given the still weak outlook for its two main consuming industries, property and construction, further weighed down by the lingering pandemic.
“At its current share price, the market is effectively valuing Malayan Cement at about 20 per cent discount to its replacement cost, which we believe is unjustified.
“For now, we value Malayan Cement at a 10 per cent discount to replacement cost, which we believe is appropriate,” it added.
As such, AmInvestment Bank has retained a “buy” recommendation on Malayan Cement’s shares with a FV of RM3.36 per share.
Meanwhile, CGS-CIMB Securities Sdn Bhd expects the inclusion of YTL Cement’s domestic operations would immediately enhance Malayan Cement’s revenue and profit outlook, and result in an 18 per cent increase in forecast FY22 book value (BV) for the enlarged company.
CGS-CIMB Securities has upgraded its recommendation on Malayan Cement to “add” from hold but kept its TP at RM3.26.
At 3.54pm, Malayan Cement’s shares rose six sen to RM2.86. — Bernama
Source: Malay Mail
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