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RAM Ratings revises rating outlook on sukuk of Lafarge Malaysia
Published on 26 Dec 2018.
RAM Ratings has revised the outlook on the long-term A1 rating of Lafarge Cement Sdn Bhd’s (Lafarge Cement or the Company) RM500 million Sukuk Wakalah Programme (2017/2024) to negative, from stable. Lafarge Cement is a subsidiary of Lafarge Malaysia Berhad (Lafarge Malaysia or the Group), the largest player in Peninsular Malaysia’s cement industry by production capacity. Given its importance as the main operating entity responsible for Lafarge Malaysia’s cement sales, we have equated the ratings of Lafarge Cement to those of the Group.
The revision of the outlook on Lafarge Cement’s long-term rating to negative from stable is premised on the continued deterioration in Lafarge Malaysia’s performance amid persistent price wars and weak cement demand, exacerbated by the cancellation of mega infrastructure projects after Malaysia’s 14th General Elections (GE14). It also reflects our view that a recovery is unlikely in the near term given the lack of positive catalysts to drive cement demand.
The average selling prices (ASPs) for cement have yet to recover amid prolonged price wars among cement producers. On the other hand, rising input prices continue to exert pressure on the Group’s profit margins. Industry overcapacity and the cancellation of mega infrastructure projects, coupled with the fear of losing market share, have been stifling cement players’ ability to increase prices to cushion against rising operating costs. Thus, Lafarge Malaysia’s loss-making position continued to worsen in 9M FY Dec 2018 as the Group’s revenue declined 5.88% y-o-y and its pre-tax loss deepened to RM325.32 million, which was 85% higher than the losses recorded in 9M FY Dec 2017. Notably, Lafarge Malaysia has been incurring operating losses for seven consecutive quarters since 1Q FY Dec 2017.
Its negative operating cashflow had prompted Lafarge Malaysia to take on additional borrowings to fund its operating costs and capex requirements, which had inflated its debt load to RM847.73 million as at end-September 2018; this may continue rising in the short term to support its operations. As such, we expect Lafarge Malaysia’s liquidity to remain tight until it can return to a sustainable level of profitability. In the meantime, it has RM392 million of available credit facilities that can be tapped if required. The Group may also draw on the support of its ultimate parent, LafargeHolcim Ltd, to address its financing needs during this challenging period. Notably, LafargeHolcim had extended a RM407 million credit line to the Group, of which RM240 million has been drawn down.
There have been some changes in Lafarge Malaysia’s senior management line-up this year, in efforts to bring in the requisite experience and expertise to turn the Group around. This includes the return of Yeoh Khoon Cheng, its long-serving former chief financial offer (CFO, 1999 to 2011). Yeoh took up the role again in August, before being appointed the interim CEO in November. The new management team is addressing production issues to enhance its operational efficiency. Besides, Lafarge Malaysia is ramping up the export of clinker to South Asia given the growing demand, with improving export prices. The Group has a competitive edge in the export markets owing to the strategic location of its Langkawi plant, which has direct access to a jetty. Lafarge Malaysia is also embarking on various cost-reduction initiatives which should help lift its operating performance in fiscal 2019.
Lafarge Malaysia stands to benefit from the support of LafargeHolcim, given the close relationship between them (as defined under RAM’s methodology on parent-subsidiary rating links). We believe that the Group remains strategically important to LafargeHolcim due to its position as the fourth largest producer in its parent’s Asia Pacific portfolio. In addition, LafargeHolcim holds 51% of Lafarge Malaysia and has been operating in Malaysia since 2001. The Group has three integrated cement plants and two grinding facilities strategically located across Peninsular Malaysia. Meanwhile, the senior executives of Lafarge Malaysia have previously held several roles within the LafargeHolcim Group in different countries. There is also a strong track record of support for the Group, such as the credit line recently granted to Lafarge Malaysia amid difficult market conditions. As such, the ratings of Lafarge Cement’s sukuk have benefitted from an uplift after considering the close relationship between these two entities.
Analytical contact
Tan Shu Xuan
(603) 7628 1165
shuxuan@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
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Published by RAM Rating Services Berhad
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