CREDIT ANALYSIS REPORT

MALAYSIA STEEL WORKS (KL) BHD - 2021

Report ID 6053890041 Popularity 85 views 14 downloads 
Report Date Sep 2021 Product  
Company / Issuer Malaysia Steel Works (KL) Bhd Sector Industrial Products - Building Materials
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
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 are based on the credit strength of Danajamin Nasional Berhad (Danajamin) which has provided an 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.

Rationale     
Masteel’s standalone credit profile shows some improvement on the back of higher steel bar price and increased sales volume. Nonetheless, its profile is moderated by the company’s modest domestic market position in the production of steel billets and steel bars, the prices of which are exposed to raw material price volatility and supply-demand dynamics in the steel industry.

Group revenue and operating profit increased y-o-y, reflecting the improvement in its financial performance in 2020. Masteel’s average selling price of domestic steel bars rose to RM2,800/MT in 1Q2021 from RM2,050/MT in 2020 (1Q2020: RM2,000/MT). Meanwhile, the sales volume of steel bars and billets increased to 475,000 MT and 150,000 MT (2019: 460,000 MT; 25,000 MT); the sharp growth in billet exports was due to increased demand from China. Over the near term, a sustained higher steel bar price and better production efficiency are expected to improve the group’s financial metrics.

The company’s use of its new induction furnace, replacing the existing electric-arc furnace (EAF), has resulted in lower production cost by RM100/MT, translating into savings of about RM48 million p.a. (based on 480,000 MT production p.a.). A sustained higher steel bar price, which is forecast to range between RM2,500/MT and RM2,800/MT, and better production efficiency would ensure improved profitability metrics. Rising demand from China for steel products has somewhat alleviated the longstanding oversupply in the local steel sector. However, the impact of the current movement restrictions and slower infrastructure projects rollout would limit any upside movement in the group’s performance.

For 1Q2021, revenue rose by 10.6% y-o-y to RM439.7 million, of which steel bar sales remained the major component, accounting for about 70%. Operating profit improved sharply to RM18.5 million (1Q2020:RM3.1 million). As at-end March 2021, the outstanding under the Sukuk Ijarah Programme is RM120.0 million, with the next repayment of RM30.0 million due in November 2021. We note with some concern that its liquidity position remains weak with cash of RM38.3 million against short-term borrowings of RM323.4 million, comprising mostly bills payable for the purchase of raw materials. Inventory days have decreased to below 150 days, partly due to higher sales volume of steel products during the period.

Rating outlook     
The stable outlook reflects our expectation that Masteel’s financial metrics will remain broadly in line with the current levels in the near term.

Rating trajectory

Downside scenario     
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 rating.

Key strengths
Longstanding player in the domestic steel industry
Moderate credit profile 

Key risks
Oversupply of steel in domestic market
Exposure to steel price volatility 
 


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