Friday, Nov 04, 2016
MARC has affirmed its rating of AAAIS(fg) on Antara Steel Mills Sdn Bhd’s (Antara) RM300.0 million Sukuk Mudharabah Programme with a stable
outlook. The affirmed rating and outlook are underpinned by the
unconditional and irrevocable financial guarantee provided by Danajamin
Nasional Berhad (Danajamin) which carries a financial insurer strength
rating of AAA/stable from MARC.
Antara’s standalone credit
profile remains weak amidst challenging conditions for the domestic
steel industry characterised by excess supply and cheaper steel imports
from China. These factors have impeded local steel producers from
benefiting from improved demand driven by an increase in infrastructure
activity. In addition, Antara has sizeable unpaid receivables due from
two related companies, namely Megasteel Sdn Bhd (Megasteel) and Lion DRI
Sdn Bhd (Lion DRI).
MARC views that the collection of
receivables from Megasteel and Lion DRI totalling RM74.1 million (net of
impairment losses of RM60.0 million) as at June 30, 2015 (FY2015) will
be protracted pending debt restructuring negotiations following their
debt defaults in 2015 and following the temporary cessation of
operations at the Megasteel plant in early 2016. Antara also suffered
significantly lower sales, and in order to minimise further losses,
Antara shut down the hot briquetted iron (HBI) plant in Labuan for 37
days on top of a 63-day closure for maintenance work in 9MFY2016, while
the melt shop in Pasir Gudang has been shut down since December 2015.
The company now sources billets for its steel bar production from the
open market. For 9MFY2016, the utilisation rate of its Labuan and Pasir
Gudang plants declined to about 42.0% and 21.5%, down from 61.0% and
43.0% respectively from the previous year.
For 9MFY2016,
Antara’s unaudited revenue declined 42.8% y-o-y to RM468.7 million
(9MFY2015: RM819.2 million) on lower sales volume and selling prices.
The company registered a pre-tax loss of RM76.6 million on lower margins
(9MF2015: pre-tax profit RM24.5 million). MARC notes Antara’s
geographical concentration of HBI customers has changed over the years
in tandem with market demand. For 9M2016, third-party domestic sales saw
a modest improvement, but overall sales fell due to a further decline
in international sales. The Pasir Gudang plant’s output continues to be
sold internally to Amsteel Mills Marketing Sdn Bhd, a marketing
subsidiary within the Lion group, which in turn sells to third parties.
In 9MFY2016, Pasir Gudang’s revenue declined by 54.4% y-o-y to RM211.7
million.
With no significant recovery in the steel industry
expected in the near term, MARC anticipates the weakness in Antara’s
operating performance to persist. The company’s liquidity remains very
tight with limited financial flexibility, and it continues to rely on
cash flows generated from operations to meet short-term obligations.
Antara made a repayment of RM60.0 million under the rated programme on
June 28, 2016. Its current outstanding amount under the programme is
RM120.0 million, of which RM60.0 million each is due on June 29, 2017
and June 28, 2018.
Noteholders are, nonetheless, insulated from
the downside risks in relation to Antara’s credit profile by 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.
Wan Abdul Muiz Wan Abdul Ghafar, +603-2082 2260/ muiz@marc.com.my,
Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.