Antara Steel Mills Sdn Bhd - 2010

MARC has affirmed the rating of Antara Steel Mills Sdn Bhd’s (Antara) RM500 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) at AID. The rating outlook is revised to positive from stable. The affirmed rating and outlook revision incorporates Antara’s overall operating profile and recent financial performance which have supported improvements in its liquidity and debt service coverage metrics. Antara has benefited from the robust profitability and cash flow generation of its Labuan-based hot-briquetted iron (HBI) production which have sufficiently offset the weak performance of its long steel products operations in Pasir Gudang and allowed Antara to report above industry average liquidity and below industry average gearing levels. The rating, however, remains constrained by the company’s exposure to the cyclical steel sector, the performance of which remains highly correlated to economic conditions. Antara’s ability to maintain its improved financial performance and fund its capital investments without significantly weakening its balance sheet will be key for a future upgrade. A weakening of its profitability and/or gearing measures will revert the outlook to stable.

Antara, a wholly-owned subsidiary of Amsteel Mills Sdn Bhd and a key member of the Lion Group, produces HBI, a form of scrap substitute used in the manufacture of high grade steel at its Labuan plant, and produces semi-finished and finished steel products such as billets and bars at its Pasir Gudang plant. MARC notes that its Labuan plant, with an annual capacity of 850,000 MT, has benefited from strong recovery in domestic and regional demand for HBI. Antara’s HBI operations registered a strong operating profit margin of 22% for the nine-month period ending March 31, 2010 (9MFY2010), significantly offsetting the weak performance of its Pasir Gudang operations. Its long steel products business continues to be hampered by high overheads and lower production efficiencies attributed in large part to its ageing plant. For 9MFY2010, its Labuan plant registered operating profit of RM142.5 million compared to an operating loss of RM5.4 million for the Pasir Gudang plant.

Antara’s turnaround in its 9MFY2010 pre-tax profit to RM124.2 million from a pre-tax loss of RM121.9 million in FY2009 is attributed in large part to its strong market position as a supplier of HBI to major steelmakers in the region. Cash flow from operations (CFO) rose sharply to RM200.5 million in the same period (9MFY2009: RM35.3 million) resulting in strong CFO interest coverage. MARC also notes that Antara’s  capital  structure  has  significantly improved  with  debt-to-equity ratio  declining to 0.31 times
(9MFY2009: 0.46 times) on the back of debt repayments and strong internal capital generation. Antara’s improved balance sheet strength has enabled it to better withstand a tougher operating environment. Antara’s shareholders’ funds stood at RM779.4 million in 9MFY2010, a significant improvement from the RM201.4 million in FY2005.
MARC regards Antara’s liquidity position supported by a sizeable RM242 million in cash and bank balances as favourable in relation to its total outstanding borrowings of RM240 million under the BaIDS. Notwithstanding this, MARC is aware that any major capital expenditure could potentially reduce its available liquidity, especially with regards to any possible upgrading exercise Antara may plan for its Pasir Gudang plant.

MARC notes that as a member of the Lion Group, which has several other steel companies in its fold, intra-group transactions stemming from the decision to centralise sales and marketing operations has enabled Antara to market its products more effectively, but also to some extent may have limited its pricing flexibility. However, apart from related party credit exposures in respect of trade receivables, intercompany loans have been prohibited under the rated facility, and dividend upstreaming has been limited. The outlook of the rating remains closely linked to industry fundamentals and is based on the assumption of sustained operating performance and stable balance sheet leverage.

Major Rating Factors

Strengths
• Strong market position as major producer of hot briquetted iron (HBI) in the region;
• Long serving operational management team; and
• Robust cash flow and low leverage position.

Challenges/Risks
• Weak profitability of Pasir Gudang operations; and
• Cyclicality of the steel industry.