RAM Ratings downgrades Lafarge Cement RM500m debt notes

It said in a statement that Lafarge Cement Sdn Bhd would supply cement from now to Dec 31, 2019 to all eight packages of work for the project.

KUALA LUMPUR: RAM Ratings has downgraded the long-term rating of Lafarge Malaysia Bhd unit's RM500mil Sukuk Wakalah programme (2017/2024) to A1 from AA2. 

The rating agency said on Monday that concurrently, the outlook for the unit Lafarge Cement Sdn Bhd has been revised from negative to stable. 

Lafarge Cement is 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, RAM Ratings has equated Lafarge Cement’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 three quarters of operating losses totalling RM175.4mil in the nine months for FY Dec 2017,” it said.

RAM Rating said this was in contrast to RM67.7mil 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,” it said.

RAM Ratings said 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 RM509.3mil 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,” it said.