RAM assigns AA2/P1 ratings to the proposed Sukuk of Lafarge Malaysia's subsidiary
RAM Ratings in a recent statement has assigned a AA2/Stable/P1 rating to Lafarge Cement’s (LCSB) proposed Sukuk Wakalah Programme of up to RM500 million, comprising IMTN and CP (2017/2024). At the same time, the AA2/Stable/P1 ratings of Lafarge Malaysia’s RM350 million Islamic Securities Programme (2010/2017) have been reaffirmed. LCSB is a wholly owned subsidiary of Lafarge Malaysia.
The credit profile of LCSB reflects its importance as the main operating entity of Lafarge Malaysia, having contributed over 70 per cent of the group’s revenue and operating profit before depreciation, interest and tax (OPBDIT) over the past few years.
Lafarge Malaysia sells its cement entirely through LCSB. Therefore, the ratings of LCSB’s proposed Sukuk are equated to those of Lafarge Malaysia. LCSB is financially strong on its own and has no external borrowings at present. Even after the issuance of the proposed Sukuk, its net gearing ratio is anticipated to remain strong at around 0.3 times.
The reaffirmation of Lafarge Malaysia’s ratings reflects RAM’s expectations that the Group will overcome near-term industry challenges given its established market position within the local cement sector, its highly integrated operations and operational support from the global network of its parent, LafargeHolcim. LafargeHolcim is the world’s largest producer of building materials.
The group’s financial performance has been affected by the increasingly competitive operating environment. Heightened pressure on cement prices due to the industry’s expanded capacity and lower consumption—attributable to slower property launches and the delayed rollout of infrastructure projects—resulted in a 35.8 per cent y-o-y decline in OPBDIT for 9M FY Dec 2016. At the same time, the group saw its pre-tax profit plunge 74.8 per cent amid heftier finance costs. Higher tax expenses owing to the depletion of reinvestment and capital allowances as well as the non-deductibility of interest expenses had further eroded its net profit. The group’s profitability is unlikely to improve until demand for cement picks up in 2017, when some mega infrastructure projects commence.
Despite the sharp decline in profitability, Lafarge Malaysia’s financial profile remains robust. As at end-September 2016, its adjusted net gearing ratio and annualised funds from operations debt cover (FFODC) stood at a respective 0.14 and 0.44 times. As the first issuance of the proposed Sukuk will be used to refinance RM280 million of Islamic Securities maturing in January 2017, the group’s gearing should remain fairly unchanged. While the group’s FFODC could decline to between 0.30 times and 0.40 times in FY Dec 2017 due to challenging operating conditions, the metrics remain supportive of its ratings. Going forward, we do not expect any significant increase in the Group’s borrowings in the absence of major capex.
With an operating history dating back to the 1950s, Lafarge Malaysia is the leader in Peninsular Malaysia’s cement industry. With three integrated cement plants and two grinding facilities strategically located across the peninsula, the group can produce up to 14.9 million MT of cement annually (about 40 per cent of the industry’s production capacity).