Antara Steel Mills Sdn Bhd - 2007

MARC has affirmed the rating of Antara Steel Mills Sdn Bhd’s (Antara) Islamic debt at AID  and revised the outlook to positive from stable. The rating affirmation reflects the strong recovery of Antara’s HBI operations in Labuan following a setback from a prolonged unplanned plant shutdown in 2006. The positive outlook incorporates MARC’s anticipation of further improvements in Antara’s debt leverage and cash flow position in light of the generally positive near-term prospects of the domestic steel industry. Moderating factors include the low profitability of Antara’s Pasir Gudang operations despite improvements in plant capacity utilisation. Additionally, rising raw material prices (e.g. scrap metal and iron ore) and operating costs may put pressure on operating margins.

In the near-term, domestic demand growth is expected to be sustained by government spending on infrastructure with the implementation of the Ninth Malaysia Plan. Antara’s Pasir Gudang plant is well positioned to capitalise on expected construction activity in the Iskandar Development Region in Johor and Sentosa Island in Singapore. The Chinese Government’s effort to curb Chinese steel exports is a contributing factor to the steel sector’s improved industry fundamentals. Nevertheless, sustained worldwide demand for steel is required to absorb recent capacity additions by steelmakers and prevent overcapacity. Global steel prices are holding up on account of the continued construction boom in China and the Middle East but overcapacity risks are rising. International scrap metal prices continue to rise; currently averaging USD310 per tonne as compared to USD250 per tonne a year ago. The uptrend in iron ore prices will likely persist with China’s steel consumption showing no signs of abating.

In FY2007, Antara’s hot briquetted iron (HBI) plants operated at 102.3%, slightly above its optimum capacity (FY2006: 43.1%); while its billets and bars operations achieved improved capacity utilisation of 92.5% (FY2006: 52.5%) and 53.3% (FY2006: 49.2%) respectively. The recent increases in the ceiling prices for steel will benefit Antara’s billets and bars operations. Removal of price controls by the Government and implementation of the Automatic Pricing Mechanism are expected to positively impact selling prices.

On a consolidated basis, Antara’s revenue increased more than two-fold to RM1,855.6 million in FY2007 (FY2006: RM749.9 million) attributed to improved sales registered by both its HBI and billets and bars operations. Profits before tax also surged to RM228.9 million in contrast to a loss of RM81.9 million in FY2006. Operating profit contribution was however predominantly from its HBI operations (98.4%) with only a marginal contribution from its billets and bars operations.

Overall, Antara’s financial profile improved in FY2007 based upon significantly higher cash flows from operation of RM185.9 million, improved liquidity and  a reduction in its debt leverage ratio to 1.1 times (FY2006: 1.9 times). In accordance with the Islamic debt redemption schedule, Antara has successfully redeemed the Serial A and B tranches totalling RM100.0 million.

Major Rating Factors

Strengths

• Sole HBI producer in Malaysia;
• mproving financial profile aided by the current steel price up cycle; and
• Expected strong demand for billets and bars produced by Pasir Gudang plant, underpinned by 

development in Johor and Singapore.

Challenges/Risks

• Improving the capacity utilisation of its Pasir Gudang bars operations; and
• Cyclicality in demand for steel products and high capital intensity of operations.