Published on 07 Apr 2021.
RAM Ratings has upgraded the long-term rating of Kedah Cement Sdn Bhd’s (the Company, formerly Lafarge Cement Sdn Bhd) RM500 mil Sukuk Wakalah Programme (2017/2024)to AA3, from A1. Concurrently, the rating outlook has been revised to stable from positive while the short-term P1 rating of the Sukuk has been reaffirmed.
As a pivotal and wholly owned subsidiary of Bursa Malaysia-listed Malayan Cement Berhad (formerly Lafarge Malaysia Berhad), Kedah Cement’s credit profile reflects that of its parent. Following YTL Cement Berhad’s acquisition of a 77% stake in Malayan Cement in May 2019, the operations of both entities have been integrated to unlock the synergies of an expanded production capacity and enlarged operational footprint. The merger has created a behemoth that commands approximately 60% of Peninsular Malaysia’s cement production capacity, somewhat easing the severe price war in the industry.
Besides a stronger market position, the enlarged group is set to reap operational synergies and scale economies in terms of manufacturing, logistics, distribution and procurement, along with the elimination of duplicated functions and corporate overheads. The rating upgrade for Kedah Cement/Malayan Cement also reflects our expectation of ready parental support from both YTL Cement and the YTL Group.
Synergistic benefits from the merger started to materialise in 2H 2019. Additionally, cement sales volumes rose in 2H 2020 compared to the first half of the year, in line with the uptick in construction activities. Despite the Conditional Movement Control Order (CMCO) in November 2020, Malayan Cement’s OPBDIT swelled more than five-fold y-o-y to RM69 mil in 1H FY Jun 2021. This is attributable to rigorous cost-cutting and the streamlining of its post-merger operations. Its funds from operations debt cover also recovered to a healthy 0.22 times (FY Jun 2020: 0.05 times). We anticipate the Group’s financials to improve in the medium term, in tandem with strengthening cement demand and supported by mega infrastructure projects such as the East Coast Rail Link, MRT Line 3 and a possible domestic high-speed rail project.
Improving cashflow had enabled Malayan Cement to pare down its debt obligations to RM892.9 mil as at end-December 2020 (end-December 2019: RM1.1 bil). Nevertheless, its liquidity position remained weak, with just RM39.4 mil of cash against RM348.1 mil of short-term debts. The Group is anticipated to derive financial flexibility from YTL Cement and enjoy extensive banking relationships, as part of the YTL Group.
The imposition of the second Movement Control Order (also known as MCO 2.0) for 7 weeks (from 13 January to 4 March 2021) is not envisaged to affect construction activities as severely as the first one did in 2020. Unlike last year’s MCO, which had limited activities to critical work, the movement restrictions this time had been less stringent. MCO 2.0 had permitted the continuance of critical work, main public infrastructure projects and building construction, as long as there were on-site accommodations or workers were housed in centralised labour quarters. Besides, neither the construction sector’s supply chain nor Malayan Cement’s operations had been disrupted. We therefore expect the financial impact on Malayan Cement to be manageable, unless movement restrictions are tightened again to curb the spread of COVID-19.
Thong Mun Wai
(603) 3385 2522
(603) 3385 2577
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2021 by RAM Rating Services Berhad
Ratings on Kedah Cement Sdn Bhd