Flash Report /
Bangladesh

Heidelberg Cement awaits regulatory approval for Emirates Cement acquisition

    Joy Bhattacharjee
    Joy Bhattacharjee

    Research Associate

    Tanay Kumar Roy
    Tanay Kumar Roy

    Research Analyst

    IDLC Securities
    9 September 2019
    Published by

    According to press reports, Heidelberg Cement Bangladesh Limited (HCBL) plans to acquire Emirates Cement Bangladesh (ECB) – a subsidiary of India’s renowned UltraTech Cement Ltd (UTC) – with a valuation of BDT2.7bn, subject to regulatory approval.

    We think the acquisition is HCBL’s attempt to remain competitive in the market where the major players have expanded their capacity significantly and are likely to continue in the coming years as well. Should HCBL acquire this 0.5mtpa grinding unit, its capacity will reach 3.43mtpa (including 0.55mtpa of capacity expansion). This will make HCBL the eight-largest cement producer by capacity. 

    However, the acquisition may not offer any significant implications on our views on HCBL. First, the transaction value implies 1.13x of ECB’s FY 19 sales, whereas HCBL is trading at 1.0x of LTM sales. Therefore, the acquisition is not cheap. Second, ECB’s FY 19 earnings of BDT435mn may not be sustainable. In fact, the company has a volatile history of earnings (Table 1) with a reserve deficit of BDT567mn. So, ECB may not be an efficient company to start with and HCBL may require a year or more to get substantial contribution from the company itself. 

    Moreover, the acquisition value would be higher than HCBL’s June 2019 cash balance of BDT1127mn. Hence, HCBL is likely to take a loan for the financing. We think it might affect HCBL’s dividend payout policy, which declined to BDT7.5/share in 2018 when HCBL planned for capacity expansion, from BDT15/share in 2017.

    As the deal is still under review, we have not incorporated it in our TP and reiterate our Hold recommendation. 

    Table 1: Emirates Cement Bangladesh Performance (BDTmn)
    Fiscal Year
    Revenue
    Profits 
    Retained earnings

    FY  11

    1368.1

    85.3

    (773.2)

    FY 12

    1887.5

    (115.3)

    (888.5)

    FY 13

    1674.5

    (138.3)

    (1026.7)

    FY 14

    2325.8

    34.6

    (992.1)

    FY 15

    2642.6

    (28.3)

    (1021.7)

    FY 16

    1873.8

    (54.5)

    (1076.2)

    FY 17

    2578.2

    41.6

    (1035.9)

    FY 18

    2864.9

    37.5

    (998.1)

    FY 19

    2393.1

    434.7

    (566.9)

    Source: UltraTech Annual Report, press reports
     
    Table 2: HCBL Dividend History (BDT)
    Year
    Dividend

    2015

    30

    2016

    30

    2017

    15

    2018

    7.5

    Source: Dhaka Stock Exchange