RAM Ratings has revised the outlook on the AA2 long-term rating of Lafarge Cement Sdn Bhd’s (LCSB) RM500 million Sukuk Wakalah Programme (2016/2023), to negative from stable. Lafarge Cement is a subsidiary of Lafarge Malaysia Berhad (Lafarge or the Group), the largest player in Peninsular Malaysia’s cement industry by capacity.

Published on 28 Jun 2017.

RAM Ratings has revised the outlook on the AA2 long-term rating of Lafarge Cement Sdn Bhd’s (LCSB) RM500 million Sukuk Wakalah Programme (2016/2023), to negative from stable. Lafarge Cement is a subsidiary of Lafarge Malaysia Berhad (Lafarge or the Group), the largest player in Peninsular Malaysia’s cement industry by capacity.

The rating of LCSB’s sukuk is equated to that of Lafarge Malaysia, reflecting its importance as the main operating entity of Lafarge, having contributed more than 70% of the Group’s revenue and operating profit before depreciation, interest and tax (OPBDIT) in the last few years. Lafarge sells its cement entirely through LCSB.

The revision of the outlook reflects our concerns that Lafarge’s performance could remain fragile as selling prices are expected to remain pressured amid the industry’s excess capacity and the persistently weak demand. Lafarge had reported an unexpected sharp decline in its performance in 1Q FY Dec 2017. The Group had been hard hit by the sharp decline in selling prices amid the much slower demand for cement as well as the new capacity that came on-stream in fiscal 2016, along with higher costs. This had led to a pre-tax loss of RM63.45 million for Lafarge in 1Q FY Dec 2017 – its first quarterly loss since 2Q FY Dec 2005. While demand could possibly pick up in 2H 2017 upon the commencement of major infrastructure projects, the Group’s performance could remain a challenge unless there is a recovery in selling prices.

Notwithstanding the challenging environment, the Group’s balance sheet remained solid with its gearing ratio standing at 0.12 times as at end-March 2017. However, Lafarge’s annualised funds from operations (FFO) plunged into negative territory in 1Q FY Dec 2017, i.e. far below our expectation of above 0.30 times. In the near term, the Group’s FFO debt cover is expected to remain weak due to pricing pressures. Unless there is a meaningful recovery in selling prices, further erosion can be expected should Lafarge raise further borrowings to fund its working capital needs.

The rating outlook could be revised to stable if a pick up in the demand for cement leads to meaningful improvements in selling prices, thus lifting Lafarge’s FFO debt cover from the negative territory. However, the rating could be downgraded should the demand for cement continue to be weak and selling prices remain pressured, keeping the Group’s FFO debt cover below 0.30 times.
Lafarge’s operating history dates back to the 1950s. With 3 integrated cement plants and 2 grinding facilities strategically located across the peninsula, the Group can produce up to 14.9 million metric tonnes of cement annually (about 40% of the industry’s production capacity).

Analytical contact
Kathleen Por
(603) 7628 1015
kathleen@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my