YTL Corp to command better pricing post-Lafarge acquisition

The acquisition will turn the new entity into the biggest cement player in the country

By MARK RAO / Pic By

YTL Corp Bhd’s potential takeover of Lafarge Malaysia Bhd will allow the company to command higher pricing power in a cement market dogged by overcapacity and high competition.

AllianceDBS Research Sdn Bhd analyst Abdul Azim Muhthar said the combined capacity between the integrated infrastructure developer and Lafarge Malaysia’s cement units will turn the new entity into the biggest cement player in the country.

“This will allow the merged unit to command better pricing power in a competitive market. If they manage to synergise their operations, greater cost competitiveness can be achieved as well,” he told The Malaysian Reserve recently.

Last week, YTL Corp tabled a RM1.62 billion bid via its unit, YTL Cement Bhd, for a 51% stake in Lafarge Malaysia.

This will see the company acquire 433.34 million shares in the cement maker at RM3.75 apiece from Associated International Cement Ltd and further triggering a mandatory offer for the remainder 49% interest.

The exercises value Lafarge Malaysia at close to RM3.2 billion and will result in Malaysia’s two largest cement manufacturers controlling an approximately 60% share of the local cement market, if the deals go through.

Abdul Azim said overcapacity and intense competition remain in the industry, but foresees demand improving and lower cement prices bottoming out, thus signalling a gradual increase in selling prices.

The recent revival of major infrastructure projects such as the East Coast Rail Link and Bandar Malaysia also bodes well for the construction industry which, in turn, would result in higher cement demand, he added.

However, Abdul Azim opined that this is contingent on when the projects themselves are implemented.

He also said the property market is expected to remain sluggish this year, partially offsetting demand for cement.

“Nonetheless, the cement industry (which depends on higher construction work) is expected to perform better this year,” Abdul Azim said.

Other leading cement makers in Malaysia include Hume Industries Bhd, Cahya Mata Sarawak Bhd, Tasek Corp Bhd, Cement Industries of Malaysia Bhd and Cement Industries (Sabah) Sdn Bhd.

Excess capacity continued to exert pressure on these players’ selling prices in 2018, while the soft property market and suspension of several large-scale construction projects negatively impacted cement demand that year.

According to the Cement and Concrete Association of Malaysia, the increase in cement production capacity from 29 million metric tonnes (MT) in 2011 to 38 million MT in 2016 marked the start of intensified competition among industry players.

This saw local cement manufacturers offering rebates to maintain volume and market share in the oversaturated industry at the expense of their profit margins.

The fact that cement manufacturing is among the most energy and capital-intensive sectors did little to help ease cost pressures, the association noted in its 2017 report.

Despite controlling approximately 40% of the market, Lafarge Malaysia was not spared and registered eight consecutive quarters of net losses from the start of 2017 to year-end 2018.

Last year, the company’s net loss widened 48.4% year-on-year to RM319.35 million as weak market conditions, coupled with intensifying competition, resulted in a decline in domestic selling prices for cement.

However, its concrete, dry mix and trading divisions remained profitable.

MIDF Amanah Investment Bank Bhd senior analyst Hafriz Hezry said YTL Corp’s consolidation of a 51% interest in Lafarge Malaysia is expected to shave off RM163 million from its net profit in 2019.

However, he said the key takeaway from the deal is the emergence of YTL Corp as the dominant cement player in Malaysia, assuming that both the 51% acquisition and subsequent mandatory offer are completed.

“Such significant consolidation could perhaps catalyse a much needed improvement in pricing power and reduce excessive competition in the industry,” he wrote in a report last week.

“YTL Corp has solid balance sheet backing and should be able to see through an estimated three years’ timeline to fully rationalise the acquisition,” he added.

Investors were positive on the news as shares in Lafarge Malaysia shot up 12.7% or 42 sen to close at RM3.72 last Thursday, while YTL Corp’s shares jumped 4.4% or five sen to close at RM1.18.

The former had since closed flat last Friday, although YTL Corp was up one sen at RM1.19.

Currently, Lafarge Malaysia is controlled by Swiss-based Lafarge- Holcim Ltd which owns an indirect 100% stake in the company.

The proposed divestment of its stake in Malaysia, as well as the agreement to divest its entire 91% interest in Holcim Singapore Ltd to YTL Cement Singapore Pte Ltd, is part of the group’s ongoing deleveraging exercises.

YTL Corp’s proposed acquisition of a 51% stake in Lafarge Malaysia is expected to be completed by the second quarter of this year (2Q19), while the subsequent mandatory offer should be completed in 3Q19.