Antara Steel Mills Sdn Bhd - 2014

MARC has affirmed the rating of AAAIS(fg) on Antara Steel Mills Sdn Bhd’s (Antara) RM300.0 million Sukuk Mudharabah Programme with a stable outlook based on the irrevocable and unconditional guarantee from Danajamin Nasional Berhad (Danajamin) on the rated sukuk. MARC has a AAA/Stable rating on Danjamin reflecting, among other factors, the financial insurer’s status as a government-sponsored and owned financial guarantee insurer and the perceived high support from the government.

Antara’s standalone credit profile has continued to weaken due mainly to the weak domestic steel industry prospects, characterised by oversupply and price pressures. The steel company’s weak performance has been compounded by scheduled and unscheduled shutdowns of its aging plants in Labuan and Pasir Gudang. The shutdown for 69 days at its Labuan plant, which produces hot briquetted iron (HBI), was due to a vessel collision with its ship loader system at its jetty. This had affected raw material supply, which led to lower capacity utilisation of 61.2% for the nine-month period ending March 31, 2014 (9MFY2014) (FY2013: 82.4%). Meanwhile upgrading works for 94 days at its older Pasir Gudang plant, which mainly manufactures billets and bars, caused average capacity utilisation to decline to 42.3% for the 9MFY2014 (FY2013: 53.8%). As a result, Antara posted lower consolidated revenues of RM887.3 million for 9MFY2014 (9MFY2013: RM1,228.9 million). Both the Labuan and Pasir Gudang plants posted operating losses amounting to RM43.7 million and RM29.1 million respectively in 9MFY2014 (9MFY2013: operating profit of RM47.6 million and operating loss of RM20.7 million respectively).

MARC also observes that Antara’s profitability has been affected by the disproportionate movements in raw material prices and selling prices of steel products as well as higher production costs as evidenced by its declining operating profit margin (FY2013: 1.3%; FY2012: 4.2%; FY2011: 7.4%). This trend has led to an operating loss margin of 8.2% for 9MFY2014. Antara has managed to renew its gas supply contract but the steelmaker remains vulnerable to any increase in electricity tariffs which may exert further pressures on the company’s profitability. MARC notes that intercompany sales, which accounted for a higher 58.6% of total revenue in 9MFY2014 (9MFY2013: 49.7%) remain a concern given the sizeable RM295.7 million  owed by the immediate holding company and its related companies as at end-9MFY2014 (FY2013: RM300.4 million). In particular, MARC notes that the overdue trade receivables from Megasteel Sdn Bhd, which stood at RM65.7 million in FY2013 (FY2012: RM68.6 million) was raised by Antara’s auditors as an emphasis of matter.

Cash flow from operations (CFO) improved to RM17.7 million in FY2013 (FY2012: negative RM189.1 million) mainly on increased trade and other payables of RM32.0 million (FY2012: decrease of RM272.9 million). For 9MFY2014, the  CFO was  RM62.7 million, providing  strong interest coverage, in part due to relatively low financing cost arising from fairly stable borrowing levels. Antara’s debt-to-equity ratio stood at 0.32 times for 9MFY2014 (FY2013: 0.35 times) which remains relatively low among its peers in the domestic steel sector.

Antara has redeemed RM60.0 million due on June 27, 2014 under the rated sukuk. While Antara does not have significant financial flexibility, its cash balances of RM186.6 million as at March 31, 2014 is deemed sufficient to meet near-term obligations. The next sukuk redemption of RM60.0 million is scheduled on June 26, 2015. However, MARC opines that meaningful recovery of Antara’s operating performance and/or effective working capital management will be crucial for the steelmaker to restore its liquidity position to a stronger level.

Noteholders are insulated from the downside risks in relation to Antara’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Major Rating Factors

Strengths

• Irrevocable financial guarantee by Danajamin Nasional Berhad.

Challenges/Risks