MARC ASSIGNS AAAID(fg) RATING TO ANTARA STEEL MILLS SDN BHD’S PROPOSED RM300 MILLION GIS; AFFIRMS AID RATING ON RM500 MILLION BaIDS

Jun 22, 2011 -

MARC has assigned a rating of AAAID(fg) to Antara Steel Mill Sdn Bhd’s (Antara) RM300 million Guaranteed Islamic Securities (GIS) programme with a stable outlook. The RM300 million GIS programme is guaranteed by Danajamin Nasional Bhd (Danajamin). At the same time, MARC has affirmed its rating of AID on Antara’s existing RM500 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) while revising the rating outlook to stable from positive to reflect Antara’s moderating financial performance in recent quarters.

The rating on the GIS 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 a conservative investment policy. The rating on the BaIDs reflects Antara’s strong domestic market position in the steel sector, its stronger credit metrics relative to its peers in the industry and the sensitivity of steel demand to worldwide general economic conditions. The impact of the recent earthquake and tsunami on the world’s second largest producer of steel, Japan, could lift steel prices in Asia higher due to the fall in production capacity caused by damage to key steel mills. Adding to steel price volatility is the recent surge in the cost of iron ore and coking coal and the cyclical demand from steel-consuming industries.

Antara’s steel operations are carried out at its Labuan plant which produces hot-briquetted iron (HBI), a form of scrap substitute used in the manufacture of high grade steel, and its Pasir Gudang plant which produces semi-finished and finished steel products such as billets and bars. MARC notes that the more profitable operations of Antara’s Labuan plant have historically compensated for the weaker performance of its ageing Pasir Gudang plant and is expected to continue do so in the near to medium term. For the first six months ended December 31, 2010 (1HFY2011), the Labuan plant registered an operating profit margin of 9.9% (1HFY2010: 18.8%) as opposed to a negative operating margin of 5.7% (1HFY2010: -1.0%) for its Pasir Gudang plant (bars and billets). In common with its domestic peers in the industry, Antara’s business continues to be subject to cyclical demand and volatility in iron ore prices which have negatively impacted its performance in 1HFY2011 compared to its full-year FY2010 performance. Operating profit declined to RM21.2 million in 1HFY2011 (1HFY2010: RM66.1million), also as a result of higher repairs and maintenance costs, in particular for its Pasir Gudang plant which registered a lower-than average utilisation rate of 47% compared to 60% in FY2010.

Antara’s financial performance had benefited from the lower raw material costs charged to cost of sales arising from a RM201.8 million inventory write-down in the previous financial year. Antara uses the weighted average inventory costing method. The improved performance was also supported by higher output for all products as well as higher average selling price for bars, which translated to strong cash flow from operations (CFO) of RM207.07 million (FY2009: RM242.08 million). Meanwhile, CFO interest and debt coverage ratios also improved as a result of reduced debt following a RM110.0 million BaIDs repayment in August 2009. With a further redemption of RM110 million in August 2010, Antara’s debt-to-equity ratio improved to 0.15 times as at December 31, 2010. MARC notes that unlike many of its domestic peers, Antara is not burdened with substantial debt. Upon the issuance of the RM300.0 million under the GIS programme and additional RM100.0 million of financing for working capital, Antara’s pro-forma D/E ratio would be increased to a still satisfactory 0.46 times.

MARC views Antara’s liquidity position as adequate relative to its near - to medium - term needs, taking into account its relatively strong cash flow generation ability and proceeds from its GIS issuance. Part of the proceeds from the new issue will be used for the final redemption of its outstanding BaIDS of RM130.0 million due in August 2011. The balance of the proceeds would be largely used to finance working capital needs. MARC believes that rising raw material prices will result in higher working capital requirements. MARC anticipates some near-term moderation of Antara’s cash flow coverage measures as a result of the additional debt taken to fund its working capital needs.

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:
Ahmad Gazzara, +603-2082 2259/ gazzara@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.