RAM Ratings has revised the outlook on the A1 long-term rating of Lafarge Cement Sdn Bhd's RM500 million Sukuk Wakalah Programme (2017/2024) to stable from negative. This was prompted by YTL Cement Sdn Bhd's acquisition of a 51%-stake in Lafarge Malaysia Berhad and a 91%-stake in Holcim Singapore Ltd from LafargeHolcim Ltd. Lafarge Cement is a wholly owned subsidiary of Lafarge Malaysia while YTL Cement is 98%-owned by YTL Corporation Berhad (YTL Corp or the Group). Upon completion of the transaction, the credit profiles of Lafarge Cement and Lafarge Malaysia will mirror that of the enlarged cement division of YTL Corp.

The merger of the two largest cement players in Malaysia will result in a dominant entity that commands 60% of the peninsula's total industry capacity. It will also reap operational synergies in terms of logistics, distribution and procurement, as well as cost savings from greater economies of scale and the reduction or elimination of duplicated functions and corporate overheads. More importantly, the industry consolidation will ease competitive pressures in this sector, which has been plagued by overcapacity and weak cement demand as mega infrastructure projects were cancelled or reviewed after the 14th General Election. These factors kept cement prices at unsustainably low levels over a prolonged period that plunged every cement player, except YTL Cement, into the red. The outlook on Lafarge Cement's long-term rating had previously been negative as tough industry conditions resulted in a severe deterioration in its performance and financial profile.

YTL Cement's credit profile is anticipated to benefit from the support of YTL Corp (rated AA1/Stable/P1), given the close relationship between the entities (as defined in RAM's methodology for parent-subsidiary rating links). The strategic direction of the cement business is driven by YTL Corp as it is viewed as a significant division which also supplies cement to the Group's construction and propdevelopment businesses. The enlarged cement business is envisaged to contribute at least 20% of the Group's revenue and pre-tax profit going forward.

While the merger is positive in respect of both the industry dynamics and YTL Cement's competitive position, its balance sheet will weaken considerably given that the acquisition will be financed via bank borrowings. The cost of the 51%-stake in Lafarge Malaysia amounts to RM1.63 bil. However, as the acquisition triggers a mandatory takeover offer for the remaining shares, the total cost of acquisition could balloon to RM3.2 bil should all minority shareholders accept the offer. Under this scenario, YTL Cement's total debt will surge to around RM5.86 bil (end-June 2018: RM1.19 bil) while its net gearing will weaken to about 1.35 times (end-June 2018: net cash) under our sensitised projections.

While YTL Cement's cashflow generation will initially deteriorate in view of Lafarge Malaysia's presently loss-making position, we expect cashflow generation to improve as cement prices gradually pick up. Prices will be supported by rising cement demand due to the revival of infrastructure spending by the Government and easing competitive pressure within the sector. As such, we expect YTL Cement's operating cashflow debt cover to improve to around 0.10 times going forward, a level seen as adequate.

 

Analytical contact
Thong Mun Wai
(603) 3385 2522
[email protected]

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

 

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