Published on 31 Jan 2020.
RAM Ratings has revised the outlook on the A1 long-term rating of Kedah Cement Sdn Bhd’s (the Company, formerly Lafarge Cement Sdn Bhd) RM500 mil Sukuk Wakalah Programme (2017/2024) to positive, from stable.
Following the acquisition of Malayan Cement Berhad (the Group, formerly Lafarge Malaysia Berhad) by YTL Cement Berhad in May 2019, the operations of both entities will eventually be merged to unlock the benefits of an enlarged cement entity. We expect Malayan Cement’s earnings and cashflow to keep improving gradually, supported by gains from operational synergies, better cost management, easing competitive pressures and an uptick in demand. Once meaningfully integrated, the credit profiles of Malayan Cement and Kedah Cement will mirror that of YTL Cement. Kedah Cement is a wholly owned subsidiary of Malayan Cement while YTL Cement is 98%-owned by YTL Corporation Berhad.
Malayan Cement remains the largest cement producer in Malaysia, commanding an estimated 40% of the industry’s production capacity in Peninsular Malaysia. Combined with YTL Cement, the enlarged group accounts for at least 60% of the sector’s capacity. The consolidation of the two biggest cement players has eased competitive pressures in this market.
The unsustainably low cement prices reportedly improved in 4Q 2019, and are envisaged to slowly recover in the next two to three years. Malayan Cement should be able to reap operational synergies and economies of scale in terms of logistics, distribution and procurement, as well as eliminate duplicated functions and corporate overheads. The Group had recently obtained approval on the mandate for recurrent related party transaction with YTL Cement - a significant step towards integrating the enlarged cement group into a more seamless operating entity.
The cement industry is exposed to the inherent cyclicality of the property and construction sectors. The soft property market as well as postponement and rationalisation of big infrastructure projects in the past one to two years have affected cement demand. Cement players are also susceptible to the price volatility of key inputs, the prices of which fluctuate according to market conditions. Pressured by an aggressive price war, feeble demand and rising input prices, Malayan Cement’s pre-tax loss deepened to RM405.39 mil in FY Dec 2018 (FY Dec 2017: RM279.04 mil). The same conditions had plunged all cement players in Peninsular Malaysia into the red, except YTL Cement.
In the first nine months of 2019, Malayan Cement’s pre-tax losses halved to RM155.79 mil, mainly on account of more stable coal prices and cost rationalisation. The Group’s cashflow also turned positive, in contrast to the deficits of the preceding two years. Apart from healthier prices, we also anticipate a gradual recovery in cement demand, underpinned by the revival of certain mega infrastructure projects.
Despite a heavier debt load of RM1.08 bil as at end-September 2019 (end-December 2018: RM837.63 mil), Malayan Cement’s balance sheet stayed relatively healthy with a gearing ratio of 0.45 times. However, its annualised funds from operations debt cover for the latest 9M period came in at a weak 0.08 times, although no longer in deficit. At the same time, the Group’s liquidity position was weak, with RM118.79 mil of cash reserves against RM817.47 mil of short-term debts. Nonetheless, Malayan Cement will be able to derive financial flexibility from YTL Cement and enjoy extensive banking relationships as part of the larger YTL Group.
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Ratings on Lafarge Cement Sdn Bhd