MARC AFFIRMS AAAIS(fg) RATING ON ANTARA STEEL MILL SDN BHD’S SUKUK WITH STABLE OUTLOOK

Sep 14, 2012 -

MARC has affirmed its rating of AAAIS(fg) on Antara Steel Mill Sdn Bhd’s (Antara) RM300 million Sukuk Mudharabah Programme (sukuk) programme with a stable outlook. The RM300 million sukuk is guaranteed by Danajamin Nasional Bhd (Danajamin). The rating on the sukuk programme is premised on MARC’s current rating of Danajamin’s financial strength at AAA/stable based on its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base supported by ample liquidity and conservative investment policy.

The proceeds from the issuance of RM300 million sukuk under the rated programme was used to refinance the outstanding RM130 million under its RM500 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) which expired on August 30, 2011 as well as for working capital and capital expenditure. The increase in borrowings has had minimal impact on Antara’s leverage position which remains low relative to its peers in the steel sector. Despite its generally stronger credit metrics among its industry peers, MARC notes that Antara’s business and financial performance has been affected by the prevailing tough operating environment for steel players. Antara’s steel operations are carried out at two plants in two different locations: its profitable Labuan plant which produces the feedstock HBI mainly for the export market; and the loss-making Pasir Gudang plant which produces semi-finished long steel products largely for internal consumption and finished products for sale mainly in the domestic market.

For the nine months ended March 2012 (9MFY2012) and FY2011, Antara’s production cost rose sharply on the back of significantly higher iron ore prices, which averaged at RM731/MT in 9MFY2012 and RM682/MT in FY2011 (FY2010: RM385/MT). Additionally with the adjustments to electricity tariffs effective from June 1, 2011, operating profit margins have eroded. Operating profit margin which stood at a healthy 15.1% in FY2010 has declined to 7.4% in FY2011, worsening to 4.0% by end-9MFY2012. MARC opines that the group may have to reassess its production processes and capacity and/or diversify its existing steel products to restore its profit margins to stronger levels. MARC notes that to this end, Antara has shutdown one of its rolling mills, which produces angle bars, at its Pasir Gudang plant in April 2011. In view of dampened demand for domestically produced angle bars arising from wide availability of cheaper imports from China, the closure of the mill is seen as a positive measure to reduce fixed costs in relation to a non-profitable product output.   

Following the closure, Pasir Gudang plant’s operating margin has improved somewhat to negative 2.9% in 9MFY2012 from a low negative 5.7% in 1HFY2010. Nonetheless, the low capacity utilisation rate of the plant at around 51% and 46% for billet and bar production respectively in 9MFY2012 remains a concern. In contrast, MARC observes that the Labuan plant’s HBI production has maintained utilisation rates at around 80% for 9MFY2012 (FY2011: 82%; FY2010: 88%), while its operating profit margin stood at 8.3% for the same period (1HFY2011: 9.9%). However, Labuan’s operating profit margin could be compressed further should the company be unable to secure a favourable gas supply contract after expiry at end-2012. Notwithstanding this, MARC opines that the more profitable Labuan plant will continue to compensate for the loss-making Pasir Gudang plant.  

For FY2011, Antara registered a slight decrease of 2.3% in revenue to RM1,651.1 million (FY2010: RM1,689.7 million) despite an overall decline in production levels that was partially offset by an increase in the average selling price of products. The production of billets, bars and HBI declined year-on-year (y-o-y) in FY2011 by 25.5%, 6.9% and 7.2% whereas average selling price rose by 4.2%, 15.5% and 15.0% respectively. For 9MFY2012, the group registered revenue of RM1,277 million which on annualising would result in 3.2% y-o-y increase to RM1,704 million. However, profit before tax has continued to decline, registering a sharply lower RM46.7 million for 9MFY2012 (FY2011: RM112 million) due mainly to increased operating costs. As a result of the weaker earnings trend, cash flow from operations (CFO) continue to decline, registering RM78.19 million in FY2011 (FY2010: RM207.1 million), and turning negative to RM87.3 million for 9MFY2012. 

Nonetheless, MARC notes the company has strong liquidity position with cash and cash equivalents standing at RM260.9 million as at 9MFY2012, mainly as a result of access to previously restricted cash of RM116.7 million that had been set aside for the redemption of the RM130 million BaIDs, which was refinanced by the RM300 million sukuk issue. As at 9MFY2012, Antara’s debt-to-equity (D/E) ratio remained fairly low at 0.30 times as in the preceding year, which would provide some headroom for additional financing. Furthermore, with the first principal payment under the sukuk issuance of RM60.0 million not due until 2014, the company is not expected to face any near-term liquidity pressures.

Note holders are insulated from the downside risks in relation to Antara’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Contacts:

Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;

Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.