Antara Steel Mills Sdn Bhd - 2009

MARC has affirmed the AID rating on Antara Steel Mills Sdn Bhd’s (Antara) RM500.0 Million Bai’ Bithaman Ajil Islamic Debt Securities and concurrently removed the rating from MARCWatch Negative where it had been since February 3, 2009 over concerns on the financial impact of a three-month shutdown of its Labuan-based hot briquetted iron (HBI) plant in late last year. The rating outlook is stable.

Antara’s rating has been affirmed based on expectations of improvements in its operating performance in 2010 with signs of a recovery in global and domestic steel demand as well as its continued ability to generate sufficient operating cash flow to pay down debt in addition to ongoing internal needs and maintain substantial liquidity in cash. Antara’s continued deleveraging has allowed the steelmaker to sustain adequate current credit protection measures notwithstanding its weak FY2009 financial performance. Major constraints to Antara’s overall credit profile are its exposure to steel price fluctuations and cyclical demand, and near-term dependence on government stimulus spending on infrastructure. Continued adherence to prudent financial policies on the part of the management, particularly in relation to dividend payouts and growth-related spending, will be vital to maintain the rating.

Antara, which is engaged in the production, trade and export of HBI through its Labuan plant, and steel billet and various types of steel bars through its Pasir Gudang plant, has now restored its production capacities to pre-crisis levels. As at August 30, 2009, the Labuan and the Pasir Gudang plant were running at about 90% and 100% capacity utilisation respectively in sharp contrast to the 39% and 43% registered for full financial year ended June 30, 2009 (FY2009) reflecting the impact from the collapse of steel prices in the period that had necessitated the plant shutdown.

As a result, for FY2009 (based on unaudited accounts) Antara’s revenue declined 44% to RM1.38 billion (FY2008: RM2.45 billion) with a pre-tax loss of RM121.9 million (FY2008: pre-tax profit of RM478.6 million). The losses were attributable to lower production volume which was compounded by inventory impairment charges of RM201.83 million. Cash flow from operations improved to RM242.08 million (FY2008: RM190.63 million) which was partially aided by the HBI extended plant shutdown and the clearing of inventories reflected in the inventory turnover days improving to 99 compared to 109 in the previous financial year.

In fiscal 2009, Antara paid out dividends of RM128.69 million and invested in RM30.01 million 5-Year 4% Irredeemable Convertible Unsecured Loan Stocks of Lion Diversified Holdings Berhad, a related company within Lion Group, a major steel producer in the country. Despite the above, the company’s cash balances remained strong at RM169.1 million (FY2008: RM220.2 million) of which RM90 million was used to redeem its BaIDs on August 28, 2009. Of concern to MARC is the potential for continued large cash outlays on dividend payouts and/or related company investments. Meanwhile, with sound cash flow generation capacity over the past few years, the company has duly reduced its borrowings resulting in gearing declining to 0.48 times as of end-FY2009 from a high of 1.93 times in FY2006.

MARC believes that should the nascent recovery in the steel sector prove to be short-lived, pressure could develop on Antara’s current rating.

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