The long term rating of AID assigned to Perwaja Steel Sdn Bhd’s (PSSB) RM400 Million Murabahah Medium Term Notes (MMTN) Programme reflects the company’s near monopoly position in the domestic market for the supply of direct reduced iron (DRI); strong demand for DRI and the proposed acquisition of a 51% controlling stake in the company by Kinsteel Berhad (Kinsteel). Upon completion of the proposed acquisition, PSSB will become part of the Kinsteel Group which will become the primary off taker of PSSB’s billets, beam-blanks and blooms. The rating is however moderated by the inherent cyclicality of the steel industry.

PSSB is principally involved in the manufacture and trading of DRI, steel billets, beam-blanks and blooms, with lump ore, iron ore pellets and scrap metal representing the bulk of PSSB’s raw material components. Maju Holdings Sdn Bhd (Maju) is currently the ultimate holding company of PSSB, with its wholly owned subsidiary Equal Concept Sdn Bhd (ECSB) holding 95% of the shareholding with the remaining 5% owned by Maju.

Kinsteel Berhad had on 7 October 2005 entered into a conditional strategic alliance agreement (SAA) with Maju for the acquisition of a 51% shareholding interest in PSSB. Upon completion of the SAA, Kinsteel will have 51% equity interest in PSSB, with Maju holding the remaining 49%. PSSB will become part of the Kinsteel Group’s integrated steel manufacturing operations, contributing a range of upstream products comprising DRI, billets, beam-blanks and blooms while providing complementary facilities to the enlarged group. PSSB’s DRI and steel making plants are situated in Kemaman, Terengganu, on the east coast of Peninsular Malaysia.

PSSB’s revenues are expected to grow under Kinsteel’s stewardship, due to Kinsteel’s strong position in the local steel industry in terms of its profit record, distribution network, and access to scrap supply. Kinsteel’s management will also bring with it efficient inventory control and better management of operating margins.

Liquidity risk has been moderated under the MMTN issue structure through the maintenance of a 6 months pre-funded profit payment at any one time. PSSB has projected an average and minimum FSCR of 8.95 times and 5.36 times respectively. Based on this projection PSSB will be able to meet the covenanted FSCR of 1.25 times throughout the tenure of the MMTN Programme. The pro-forma debt ratio for PSSB is expected to be at 1.17 times upon issuance of the RM400 million MMTN, well within the covenanted ratio of 1.75 times.

PSSB’s unaudited results for FY2005 show a net loss of RM94.1 million (FY2004: net profit RM45.8 million) attributed to lower operating profit margins caused by lower steel prices and one-off provisions made during the financial year. With the current recovery in international steel prices which started in the 4th quarter of 2005 the company’s prospects for a turnaround in 2006 appear favourable particularly under the management of Kinsteel.