RAM Ratings reaffirms Kedah Cement’s sukuk ratings

RAM Ratings has reaffirmed the AA3/Stable/P1 ratings of Kedah Cement Sdn Bhd’s (the Company, formerly Lafarge Cement Sdn Bhd) RM500 mil Sukuk Wakalah Programme (2017/2024). 

As a wholly owned subsidiary and key revenue contributor of Bursa Malaysia-listed Malayan Cement Berhad (formerly Lafarge Malaysia Berhad), Kedah Cement’s credit profile reflects that of its parent. In turn, Malayan Cement’s ratings mirror the ratings of YTL Cement Berhad, which owns 78.6% of the former.

Malayan Cement’s market position as the largest cement producer in Peninsular Malaysia is a significant rating strength. In September 2021, Malayan Cement acquired YTL Cement’s cement and ready-mixed concrete businesses in Malaysia for RM5.16 bil. The restructuring effectively consolidated YTL Cement’s enlarged cement and ready-mixed concrete businesses in Malaysia under Bursa Malaysia-listed Malayan Cement. 

Malayan Cement now controls about 65% of Peninsular Malaysia’s cement production capacity. This exercise allows both entities to reap operational synergies through economies of scale, an enhanced market presence, shared expertise and resources as well as the elimination of overlapping functions. We expect these factors, together with a significant reduction in related-party transactions between the two parties, to translate into greater cost savings which will lift Malayan Cement’s operational efficiency and financial performance going forward. The progression of several mega projects such as the East Coast Rail Link, West Coast Expressway, Central Spine Road and potential Mass Rapid Transit Line 3 will support demand for cement, aiding price recovery.

Aggressive cost cutting measures as part of integration efforts helped turn Malayan Cement’s bottom line around for FY June 2021 with a pre-tax profit of RM8.2 mil, after years of losses. However, operational disruptions caused Malayan Cement to swing back into the red in 1Q FY June 2022, posting an operating loss of RM5.5 mil (FY June 2021: RM149.3 mil operating profit). A full lockdown (from 1 June to 14 June 2021) and the National Recovery Plan (effective 15 June 2021) which allowed only critical activities had again diminished cement consumption and left plants idle. Barring this quarter, we expect Malayan Cement’s earnings for the full year to improve, supported by better cement demand and a more positive price outlook post-reopening of the economy as well as better cost efficiencies.

In FY June 2021, Malayan Cement’s funds from operations debt cover improved markedly to 0.24 times (FY June 2020: 0.05 times) on the back of reduced debt levels and stronger profitability from higher selling prices. Gearing as at end-September 2021 weakened to 0.71 times following the drawdown of borrowings for the acquisition of YTL Cement’s cement and ready-mixed concrete businesses in Malaysia and subsequent consolidation of debts of the newly acquired companies (end-June 2021: 0.31 times). This level is still viewed to be supportive of the issue ratings. Malayan Cement is anticipated to derive financial flexibility from YTL Cement and enjoy extensive banking relationships as part of the larger YTL Group.