[RAM] RAM Ratings assigns AA3/P1 ratings to Malayan Cement's proposed IMTN and ICP
RAM Ratings has assigned AA3/Stable and P1 ratings to Malayan Cement Berhad’s (the Group) proposed Islamic Medium-Term Notes and Islamic Commercial Papers of up to RM5.0 bil under the Sukuk Murabahah Programme (the Proposed Sukuk).
Proceeds from the Proposed Sukuk will be utilised for shariah-compliant general corporate purposes including future investments, capital expenditure, working capital requirements and refinancing existing borrowings, including maturing sukuk tranches under the RM500.0 mil Wakalah programme (2017/2024) (rated AA3/Stable by RAM) of Kedah Cement Sdn Bhd – the Group’s wholly owned subsidiary.
Malayan Cement’s solid market position as Malaysia’s largest cement producer and supplier is a significant rating strength. Subsequent to its acquisition by YTL Cement Berhad in 2019, Malayan Cement benefits from synergies in terms of logistics, wider geographical coverage, shared expertise and cost savings from greater economies of scale. Given that YTL Cement is the industry’s most cost-efficient cement producer, the Group has gained from the former’s know-how in this regard. The challenging operating environment due to industry overcapacity and volatile input prices are moderating factors.
As part of the larger YTL Group, Malayan Cement is expected to derive financial flexibility and enjoy extensive banking relationships. Based on RAM’s methodology for parent-subsidiary rating links, Malayan Cement is deemed to have a close relationship with its parent, YTL Corporation Berhad (YTL Corp, rated at AA1/Negative/P1). Malayan Cement and YTL Cement share a common strategic direction and top management team that are considered to be aligned with YTL Corp. The ratings of the Proposed Sukuk, therefore, benefit from this alignment with YTL Corp.
In 9M FY Jun 2022, Malayan Cement’s revenue and bottom line jumped to a respective RM1.9 bil and RM73.6 mil (9M FY Jun 2021: revenue of RM1.1 bil and pre-tax loss of RM1.1 mil) owing to the consolidation of financial results of companies newly acquired by the Group from YTL Cement under a restructuring exercise, as well as an increased sales volume and higher selling price. Completed on 21 September 2021, the exercise saw YTL Cement inject its entire cement and ready-mixed concrete operations in Malaysia into Malayan Cement for RM5.16 bil.
As at end-March 2022, Malayan Cement’s debt load grew to RM3.9 bil (end-June 2021: RM774.9 mil) following the drawdown of borrowings for the acquisition of YTL Cement’s abovesaid businesses in Malaysia and the subsequent consolidation of debts of the newly acquired companies. As expected, this resulted in higher gearing of 0.67 times, albeit still healthy for the Group’s current ratings (end-June 2021: 0.31 times).
Despite better cashflow generation after earnings consolidation, Malayan Cement’s annualised funds from operations FFO debt cover decreased to 0.09 times in 9M FY Jun 2022 (FY Jun 2021: 0.24 times) in view of a larger debt load and partial contributions from the newly injected businesses as they were consolidated only from 21 September 2021 onwards. While we expect cashflow to improve as they gradually pass on costs and pare down debts, current headwinds such as rising input and logistic costs, and a slower pick-up in domestic construction activity amid a protracted labour shortage are likely to slow the improvement in debt coverage.
The Group has stepped up efforts to manage the cost pressure. As the largest player domestically, Malayan Cement has bolstered its economies of scale and operational efficiencies. Enhanced use of alternative fuels has also alleviated cost pressures. Currently escalated shipping costs have caused neighbouring countries to switch to Malayan Cement for supply given its proximity. Higher export volumes will increase the utilisation rate, which will in turn lower the Group’s unit production cost.
Analytical contacts
Wong Ee Loo
(603) 3385 2521
eeloo@ram.com.my
Thong Mun Wai
(603) 3385 2522
munwai@ram.com.my