FW: RAM Ratings downgrades sukuk rating of Lafarge Malaysia's subsidiary to A1, revises outlook to stable

 

Published on 29 Jan 2018.

RAM Ratings has downgraded the long-term rating of Lafarge Cement Sdn Bhd’s (LCSB) RM500 million Sukuk Wakalah Programme (2017/2024) to A1 from AA2. Concurrently, the outlook has been revised from negative to stable. LCSB is a wholly owned subsidiary of Lafarge Malaysia Berhad (Lafarge Malaysia or the Group) – the largest cement manufacturer in Peninsular Malaysia by capacity – and is the Group’s primary cement sales and marketing arm. Given its importance to the Group, we have equated LCSB’s sukuk rating to that of Lafarge Malaysia.

The downgrade is premised on the sharp deterioration in Lafarge Malaysia’s financial performance and debt-servicing metrics amid the challenging operating environment. Depressed demand (-6% in 2016), industry overcapacity and intense price competition along with the Group’s high operating costs had resulted in 3 quarters of operating losses totalling RM175.4 million in 9M FY Dec 2017. This was in contrast to RM67.7 million of operating profit in FY Dec 2016. Consequently, its funds from operations debt coverage (FFODC) ratio sank from a strong 0.59 times into negative territory over the same period – significantly worse than expected. 

Although Lafarge Malaysia’s top line should improve in 2018 amid a ramp-up in major infrastructure projects that will drive demand for cement, we envisage its earnings to remain muted given the current industry headwinds. The stronger demand is not expected to fully compensate the existing market overhang, and in turn translate into any meaningful improvement in cement prices over the course of the year. As a result, it will take longer for the Group to return to its earlier profitability and FFODC levels. 

Separately, Lafarge Malaysia’s balance sheet remained healthy as at end-September 2017, with respective gearing and net gearing ratios of 0.19 and 0.16 times. Nonetheless, its debt load had surged 62% since end-December 2016 to fund the Group’s working capital and capex requirements, and may continue rising in the short term to support its operations. As such, we expect its liquidity to remain tight until it manages to return to sustainable levels of profit. In the meantime, it has RM509.3 million of available credit facilities that it can tap into if required. Lafarge Malaysia may also draw on support from ultimate parent LafargeHolcim Ltd to help address its financing needs during this challenging period.

Lafarge Malaysia stands to benefit from potential support from LafargeHolcim, given the close relationship of the entities (as defined in RAM Ratings’ Criteria on Parent-Subsidiary Rating Links). LafargeHolcim also charted improvement in its financial and business profiles since FY Dec 2015. We believe the Group is strategically important to LafargeHolcim due to its position as the 4th largest market in LafargeHolcim’s Asia Pacific portfolio. LafargeHolcim also owns 51% of Lafarge Malaysia, which has an operating history that dates back to the 1950s. With 3 integrated cement plants and 2 grinding facilities strategically located across Peninsular Malaysia, the Group can produce up to 14.9 million metric tonnes of cement annually (about 42% of the industry’s production capacity). As such, the rating benefits from an uplift after considering the relationship between the 2 entities.

 

Analytical contact
Chin Jin Han
(603) 7628 1168
jinhan@ram.com.my

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