RAM Ratings reaffirms rating of Prestar's debt facility

Published on 12 July 2011
RAM Ratings has reaffirmed the short-term P2 rating of Prestar Resources Berhad’s (Prestar or the Group) RM120 million Nominal Value Commercial Papers (CP) (2005/2012). Prestar is an investment-holding company with subsidiaries engaged in steel processing, fabrication of steel pipes as well as the manufacture and trading of steel products.

The rating of Prestar’s CP is mainly premised on its established position in Malaysia as a sizable local downstream steel player. Besides having one of the larger local steel-processing centres, Prestar also commands approximately half of the market for the manufacture of guardrails in Malaysia. The rating is further supported by the Group’s diversified spectrum of steel products, which caters to many industries and hence reduces its exposure to any particular segment.

Like most steel players, however, Prestar is exposed to volatile steel prices, resulting in fluctuating margins. We note that this can be particularly evident for Prestar as it tends to increase its purchase of raw materials when prices are on an uptrend, and vice versa, as noted amid the opposing trends in prices during the first and second halves of 2010. “Prestar’s margins broadened in 1H FY Dec 2010 as the Group had benefited from the uptrend in steel prices. On the other hand, its margins went into negative territory in 2H FY Dec 2010 when steel prices were on a sustained downtrend, made worse by the Group’s enlarged inventory of expensive steel,” observes Kevin Lim, Head of RAM Ratings’ Consumer & Industrial Ratings.

“Despite the challenging conditions, Prestar was able to post a 20.3% y-o-y increase in revenue to RM553.63 million in fiscal 2010 (FY Dec 2009: RM459.88 million), driven by increased sales volumes for some of its main products and overall higher steel prices y-o-y. Nonetheless, the Group’s pre-tax margin had been affected by falling steel prices in the second half,” adds Kevin.

Meanwhile, Prestar’s financial profile remained relatively unchanged in fiscal 2010. Although its borrowings had increased slightly, its gearing ratio stayed stable at a moderate 1.08 times, supported by increased equity through retained earnings.

Similarly, Prestar’s funds from operations (FFO) debt coverage was kept unchanged at 0.11 times as at end-FY Dec 2010. However, the Group’s operating cashflow debt coverage was almost halved to 0.08 times y-o-y, owing to heftier working capital.

Moving forward, RAM Ratings expects Prestar’s gearing level to be maintained at about 1 time over the next 2 years while its FFO debt coverage hovers around 0.1 times, supported by resilient demand for the Group’s core products.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my