MARC DOWNGRADES ITS RATINGS ON KINSTEEL BERHAD’S RM200 MILLION ISLAMIC DEBT PROGRAMMES TO MARC-3ID/BBBID; OUTLOOK NEGATIVE

May 15, 2013 -

MARC has downgraded its ratings on Kinsteel Berhad’s (Kinsteel) RM100.0 million Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme and RM100.0 million Murabahah Medium Term Notes (MTN) Programme to MARC-3ID/BBBID and BBBID from MARC-2ID/A-ID and A-ID respectively. Concurrently, MARC has removed the ratings from MARCWatch Negative where it had been placed on April 17, 2013. The ratings outlook is negative. The lowered ratings reflect the group’s weaker-than-expected operating performance in the financial year ending December 31, 2012 (FY2012). The consolidated pre-tax losses during the past two years have resulted in elevated debt leverage ratios and will make it challenging for the group and Kinsteel to secure financing for its upcoming debt maturities. Overall, MARC considers Kinsteel’s liquidity profile to be rather weak and regards the recent decline in its cash position to be a key rating concern.

Kinsteel Group is an integrated steel manufacturer involved in the manufacture and trading of finished long steel products such as reinforced bars, wire rods and wire mesh. In view of the prolonged weak demand for its end products that has weighed heavily on its recent performance, the group has closed one of its three manufacturing plants. In addition, the performance of its upstream segment, which is undertaken by its subsidiary Perwaja Steel Sdn Bhd (Perwaja), had also suffered due mainly to raw material price volatility. Perwaja, which manufactures direct-reduced iron (DRI) and semi-finished steel products, the bulk of which is used for Kinsteel’s downstream operations, is in the process of constructing iron-ore concentration and pelletising plants which when completed would provide a buffer against iron ore price volatility and offer a reliable supply of pellets. Nonetheless, the RM230.0 million project was funded by borrowings which has led to higher group debt.

For FY2012, Kinsteel Group registered a consolidated pre-tax loss of RM236.1 million (FY2011: negative RM308.1 million) despite a marginal increase in revenue to RM2.1 billion (FY2011: RM2.0 billion). MARC observes that the group continued to be saddled with high inventory levels, the build-up of which began in 2010. The financial performance continued to be characterised by inventory write-downs amounting to RM122.0 million in FY2011 and RM90.6 million in FY2012. MARC notes that Kinsteel Group’s borrowings have remained high, increasing slightly to RM1,877.0 million in FY2012 (FY2011: RM1,845.8 million) while shareholders’ funds eroded to RM1,036.0 million (FY2011: RM1,316.7 million). As a result, the debt-to-equity (DE) ratio, on excluding loans from the government and a related party of RM182.8 million, worsened to 1.64 times at end-FY2012 (FY2011: 1.27 times).

At the company level, Kinsteel’s borrowings stood at RM658.5 million at end-December 2012 (FY2011: RM739.3 million), translating to a DE ratio of 1.73 times (FY2011: 1.95 times).  MARC observes that cash flow from operations (CFO) improved to RM308.9 million in FY2012 (FY2011: negative RM8.4 million), largely on account of net receivable collection. Nonetheless, Kinsteel’s cash balance declined to RM9.6 million (FY2011: RM31.2 million) due mainly to a heavy debt repayment of RM171.6 million during the year. Given Kinsteel’s very weak liquidity position in relation to its upcoming obligations under the rated facilities, MARC is concerned over the company’s ability to meet the repayment. Kinsteel has RM40.0 million CP/MTN notes maturing on August 28, 2013 and RM10.0 million MTN due on September 6, 2013 under a combined outstanding amount of RM100.0 million of rated facilities. In addition, its subsidiary Perwaja has a scheduled repayment of RM50.0 million of the RM110.0 million outstanding under its Murabahah Medium Term Notes (MMTN) programme on September 25, 2013.

The negative outlook reflects MARC’s view that Kinsteel will continue to meet challenges to generate sufficient liquidity to meet its financial obligations. The ratings could be lowered further if there is indication that financing for Kinsteel’s CP/MTN and MTN cannot be achieved ahead of their respective maturities and/or Kinsteel’s financial metrics continue to deteriorate in the coming months.

Contacts:

Ngiam Tee Wei, +603-2082 2268/ teewei@marc.com.my;

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

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