MARC AFFIRMS AAAIS(FG) RATING ON ANTARA’S SUKUK WITH STABLE OUTLOOK

Sep 17, 2013 -

MARC has affirmed the rating of AAAIS(fg) on Antara Steel Mills Sdn Bhd’s (Antara) RM300.0 million Sukuk Mudharabah Programme with a stable outlook. The affirmed ratings and outlook are underpinned by the financial guarantee provided by Danajamin Nasional Berhad (Danajamin) for the sukuk. MARC currently rates Danajamin’s financial strength at AAA/Stable based on the financial insurer’s status as a government-sponsored entity and perceived high governmental support for its role in facilitating greater corporate access to the domestic sukuk and bond markets.

Antara’s standalone credit profile has weakened sharply in recent years due mainly to the prevailing difficult conditions in the steel industry which have led to weak demand and declining prices for its steel output. The company’s Labuan plant which manufactures hot briquetted iron (HBI), a feedstock for steelmaking, has fared better than its Pasir Gudang plant due largely to its focus on the export market and fairly strong tie-up with a major steel player in Korea. Antara’s Pasir Gudang operations, which largely consist of manufacturing semi-finished long steel and finished products mainly for domestic consumption, have been plagued by low plant utilisation rates and high overheads. For 9MFY2013, the Pasir Gudang plant registered an operating loss of RM20.7 million (9MFY2012: negative RM19.0 million) as compared to the Labuan plant’s operating profit of RM47.6 million (9MFY2012: RM69.6 million)

MARC notes that on a consolidated level, Antara’s revenue was marginally lower at RM1,228.9 million for 9MFY2013 compared to the previous corresponding period (9MFY2012: RM1,277.0 million), with sales to related companies within the Lion Group comprising 49.7% of total sales. While inter-related company sales have been a characteristic feature of Antara’s sales in order to streamline group’s marketing efforts, MARC observes that the proportion sold to related parties has increased in recent years. This has also led to a rapid increase in amounts owed by the immediate holding company and related companies, which rose by 114.4% to RM229.3 million in FY2012 (FY2011: RM106.9 million) and further to RM291.7 million as at end-9MFY2013. MARC also views with concern the RM68.6 million in trade receivables due from a related company in FY2012 remaining overdue, which has been raised as an emphasis of matter by Antara’s auditors.

MARC notes that the disproportionate movement in raw material price and selling price of steel products has led to a declining trend in operating profit margin since FY2010 (FY2010: 15.1%; FY2011: 7.4%; FY2012: 4.2%). The profit margins could come under further pressure if Antara is unable to renew its long-term gas supply contract on current terms, which are considerably lower than average market rate. The gas supply contract which expired in October 2012 is being renewed on a periodic basis pending negotiations on a new tariff.

For FY2012, cash flow from operations (CFO) was negative RM195.4 million (FY2011: RM78.2 million) due to lower earnings before tax of RM55.7 million (FY2011: RM112.0 million) and sizeable reduction in payables of RM272.9 million mainly on account of payments for iron ores. MARC considers Antara’s leverage position to be among the lowest in the domestic steel sector, with a debt-to-equity ratio of 0.30 times in FY2012 (FY2011: 0.30 times). The company’s main borrowing is the outstanding RM300.0 million under the rated programme, of which the first principal payment of RM60.0 million is due on June 27, 2014. Antara’s liquidity position as reflected by cash and bank balances of RM225.1 million at end-9MFY2013 (FY2012: RM146.7 million) remains strong to meet its financial obligations under the programme.

Noteholders 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:

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

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

Rajan Paramesran, +603-2083 2233/ rajan@marc.com.my.