RAM Ratings expects the recently announced proposed acquisition of Lafarge Malaysia Berhad and Holcim Singapore Ltd by YTL Corporation Berhad's (YTL Corp or the Group) 98.0%-owned subsidiary, YTL Cement Berhad (YTL Cement), to have no immediate impact on the AA1/Stable ratings of YTL Corp's RM500 mil MTN Programme (2004/2019) and RM2 bil MTN Programme (2013/2038). The expanded cement business of the Group will account for some 60% of Malaysia's cement manufacturing capacity. ''We believe the enlarged cement operations under YTL Corp will continue to benefit from scale and the operational and costs synergies of operating under a common umbrella. Amid an overly aggressive price war over the last few years, YTL Cement has remained in the black while the other cement players all slipped into financial losses,'' highlights Davinder Kaur Gill, RAM's co-head of Infrastructure & Utilities Ratings.

YTL Corp's debt-servicing ability remains supported by the projected dividend payments from the Group's operating entities to service its company-level adjusted debt load, which stood at RM6.23 bil as at end-June 2018. ''Despite the proposed acquisition, YTL Corp's minimum combined operating cashflow (OCF) net debt coverage ratio  which includes the company-level debts of its key operating subsidiary, YTL Power International Berhad (YTLPI)  is expected to remain within the rating threshold of 0.20 times. We had previously projected a decline in the dividend-paying capacity of YTL Cement, ahead of this acquisition, owing to the competitive operating landscape, which had eroded its earnings in the last two years,'' adds Davinder. RAM places greater emphasis on YTL Corp's company-level credit metrics, given that most of the debts of its operating entities are concession- or REIT-related and have no recourse to the holding company.

The acquisition of a 51% stake in Lafarge Malaysia and a 91% interest in Holcim Singapore, along with the associated mandatory takeover offer (MTO)the remaining shares of the former, could raise YTL Cement's debt level to as high as RM5.75 bil if the MTO is successful (end-December 2018: RM1.47 bil). ''That said, YTL Corp is not expected to extend any guarantee or equity support for the funding of this acquisition and we understand it will be funded by loans that YTL Cement has already secured from local financial institutions. We, however, continue to view the cement business as a strategic division of YTL Corp, as the enlarged cement division is expected to maintain its position as a sizeable earnings contributor of the Group, accounting for at least 20% of revenue and pre-tax profit going forward,'' explains Davinder. 

Assessed against YTL Cement's current earnings and cashflow-generating profile as well as Lafarge Malaysia's loss-making position (which is anticipated to keep improving in 2019 amid numerous ongoing cost-improvement measures), the leverage and debt-coverage indicators of YTL Corp's enlarged cement division are expected to be challenged over the next couple of years. In the interim, YTL Cement's RM1.2 bil of cash reserves (as at end-June 2018) will serve as a cushion against any financial support that Lafarge Malaysia would need for its ongoing operations.

Moving ahead, we anticipate a recovery in cement and clinker demand, underpinned by the revival of local mega-infrastructure projects such as the East Coast Rail Link and Bandar Malaysia. We also envisage a gradual recovery in the price of cement, which has been severely depressed over the last two years amid an overly aggressive price war. An earnings recovery for the sector will bode well for YTL Cement's financial capacity to service its enlarged debt base and to honour its annual projected dividend payments to YTL Corp although we note that future dividends are expected to be lower than historical payouts.  

YTL Corp's financial health will also remain supported by its robust financial flexibility and superior liquidity positioh RM9.68 bil of unencumbered cash reserves parked under YTLPI as at end-June 2018. 

 

Analytical contact
Chin Wynn, CFA
(603) 3385 2515
[email protected]

Media contact
Padthma Subbiah
(603) 3385 2577
[email protected]

 

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Published by RAM Rating Services Berhad
? Copyright 2019 by RAM Rating Services Berhad

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