Press Metal Bhd - 2013

MARC has downgraded its rating on Press Metal Berhad’s (Press Metal) outstanding RM317.5 million Redeemable Convertible Secured Loan Stocks (RCSLS) with detachable warrants from A- to BBB. Concurrently, the rating has been placed on MARCWatch Negative pending greater clarity on the credit impact from the unexpected shutdown of Press Metal’s aluminium smelting plant in Mukah, Sarawak, due to damage suffered from a power outage on June 27, 2013. 

The rating downgrade is premised on the weakened business and financial profile of the Press Metal group, arising mainly from the recent sharp decline in aluminium price and impact of debt-financed expansion on its leverage in connection with its RM1.8 billion aluminium smelting plant in Samalaju, Sarawak. The construction of the Samalaju plant, undertaken by subsidiary Press Metal Bintulu Sdn Bhd (PMBintulu), meanwhile, is nearing full completion, with the first two phases of 120,000 MT/pa each fully operational and the final phase of 80,000 MT/pa to be fully operational by mid-July 2013. Press Metal’s new capacity will come onstream at a time when global demand for aluminium has waned with aluminium price declining sharply by about 37.9% from US$2,786/MT at end-May 2011 to US$1,729/MT at end-June 2013. In MARC’s view, sustained weak market conditions for aluminium will pose elevated risk to Press Metal’s credit risk profile and subsidiary PMBintulu’s ability to comply with its covenant of a minimum required debt service coverage ratio (DSCR) of 1.25 times.

Compounding Press Metal’s current challenges is the recent unexpected shutdown of the 120,000 MT Mukah plant, for which the longer term credit implications remain unclear. MARC believes that Press Metal faces increased credit risks in the next 12 to 18 months due to the extensive damage to the plant and the immediate impact on operating income and cash flow while insurance claims are being processed. Further analysis of the financial and operational consequences of the plant shutdown will be undertaken as more information comes available regarding the extent of the damage and required construction, insurance coverage, and the impact on existing financing arrangements, among other factors.

For first quarter ended March 31, 2013 (1QFY2013), Press Metal group registered pre-tax profit of RM35.3 million on the back of revenue of RM724.2 million as compared to the previous year corresponding quarter’s RM32.8 million and RM525.1 million respectively owing mainly to an increase in aluminium production. Finance costs incurred were RM33.9 million in 1QFY2013 (FY2012: RM105.7 million). Cash flow from operation (CFO) was significantly lower at RM54.2 million in 1QFY2013 (1QFY2012: RM125.6 million). MARC observes that as a result of Press Metal’s large capital investment programme and higher working capital requirement, the group’s borrowings have increased to RM2.7 billion at end-March 2013 from RM1.9 billion at end-FY2011, translating to debt-to-equity ratio of 1.91 times. Of concern to MARC is the high reliance on short-term borrowings which account for 61% of total borrowings at end-1QFY2013. Upcoming repayments on the company’s RCSLS of RM31.8 million and PMBintulu’s syndicated term loan from February 2014 onwards will exert pressure on the group’s liquidity.

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Challenges/Risks