CREDIT ANALYSIS REPORT

MALAYSIA STEEL WORKS (KL) BHD - 2020

Report ID 605233 Popularity 518 views 9 downloads 
Report Date Aug 2020 Product  
Company / Issuer Malaysia Steel Works (KL) Bhd Sector Industrial Products - Building Materials
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale
MARC has affirmed its AAAIS(fg) rating on Malaysia Steel Works (KL) Bhd’s (Masteel) RM130.0 million Sukuk Ijarah Programme with a stable outlook. The affirmed rating and outlook reflect the credit strength of Danajamin Nasional Berhad (Danajamin) which has provided unconditional and irrevocable financial guarantee insurance on the programme. MARC maintains an insurer financial strength rating of AAA/stable and long-term counterparty credit rating of AAA/stable on Danajamin.

Masteel’s standalone credit profile has weakened in recent years due to the unfavourable steel price from an overcapacity in domestic steel production. The low steel price has weighed on its earnings and profitability margin. Coupled with sluggish steel consumption which has been exacerbated by the COVID-19 pandemic, the group’s financial performance would remain under pressure in the near- to medium-term. MARC notes that following the easing of measures imposed to combat the pandemic, construction activities have resumed. As the construction sector is the main offtaker of steel products, steel demand could see some improvement although full recovery of the sector remains challenging in the near term.

For 1Q2020, Masteel recorded higher revenue y-o-y to RM397.6 million but recorded losses before tax of RM4.8 million. During this period, average steel bar price stood at RM2,020/MT (2019: RM2,104/MT; 2018: RM2,471/MT).  Sales of steel bars remain the major component of its revenue, accounting for about 78% of total revenue in 1Q2020. For full year 2019, Masteel recorded a 20.1% y-o-y decline in revenue to RM1,195.3 million (2018: RM1,496.9 million) mainly attributable to the suppressed domestic demand for steel bars arising from slow progress in several infrastructure projects as well as lower selling prices of steel bars. In late-2018, the entry of a China-owned steel mill, which added 3.5 million MT in production capacity into the domestic market has led to a price war resulting in depressed steel prices. As a result, the group recorded losses before tax of RM20.7 million, translating into a negative cash flow from operations (CFO) for the first time since 2015. Nonetheless, the management indicated that there is a rising demand for steel billet from China that may partly mitigate the lower domestic demand. In 1H2020, the group has been focusing on the export of its steel billets to China via some major trading intermediaries. Going forward, pressure on the steel price due to the overcapacity and lower demand in the domestic market would negatively impact earnings. 

At end-March 2020, Masteel’s debt-to-equity (DE) ratio stood at 0.61x. Masteel’s liquidity position remains weak with RM50.1 million in cash and bank balances, against a short-term debt of RM308.5 million comprising mostly bills payable. The bills payable had been utilised to purchase raw materials for its production of new steel orders. Inventory days have increased to over 150 days, partly due to Masteel holding a higher amount of scrap steel to offset rising input costs through larger purchases. 

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

Major Rating Factors

Strengths
Longstanding player in the domestic steel industry; and
Moderate leverage position.

Challenges/Risks
Oversupply of steel in local market;
Steel price volatility impacted further by the COVID-19 pandemic; and 
Managing raw material and production costs. 



Related