CREDIT ANALYSIS REPORT

MALAYSIA STEEL WORKS (KL) BHD - 2022

Report ID 6053890046948 Popularity 71 views 7 downloads 
Report Date Nov 2022 Product  
Company / Issuer Malaysia Steel Works (KL) Bhd Sector Industrial Products - Building Materials
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Rationale
Rating action     
MARC Ratings has affirmed its AAAIS(fg)  rating on Malaysia Steel Works (KL) Bhd’s (Masteel) RM130.0 million Danajamin Nasional Berhad-guaranteed Sukuk Ijarah Programme with a stable outlook. The affirmed rating and outlook are based on MARC Ratings’ assessment of the credit strength of Danajamin (AAA/Stable) which has provided an unconditional and irrevocable financial guarantee insurance on the programme. Upon the completion of the amalgamation exercise of Danajamin and Bank Pembangunan Malaysia Berhad (BPMB), BPMB will honour Danajamin’s obligations under the guarantees. Accordingly, Masteel’s guaranteed sukuk will then carry BPMB’s AAA/Stable rating.     

Rationale     
Masteel’s credit profile incorporates its longstanding track record in the domestic production of steel billets and steel bars, its moderate domestic market position and the improving operational efficiency from continued investment in production technology. The group is exposed to the volatility of steel price and raw material cost, both of which can weigh on its operating profit margins and lead to sharp fluctuations in financial performance.     

Group financial performance improved, attributable to the higher steel bar price; for 1H2022, revenue grew by 12.8% y-o-y to RM894.5 million as the average selling price of domestic steel bars rose to RM3,020/MT from RM2,600/MT in 1H2021. This was contributed by normalisation of economic activities following the easing of pandemic-induced restrictions. However, we expect prices to normalise over the near term to range between RM2,800/MT and RM3,000/MT. We also note that sales for its mostly China-bound billets were lower at 24,000 MT (1H2021: 42,500 MT) as intermittent closures in China has weighed on steel demand due to slower construction activities.     

In terms of operating profit margin, Masteel recorded 3.4% for 1H2022 (1H2021: 4.8%) on the surge in raw material prices during the period. While we note some easing in raw material cost, it remains elevated compared to recent historical levels and therefore margins could continue to come under pressure. We note inventory days has remained manageable, standing at 142 days in 1H2022, below the group’s internal target of 150 days.     

The group’s liquidity position is moderate with cash of RM62.1 million against its maturing term borrowings of RM40.0 million comprising notes under the rated programme. Group borrowings rose to RM452.5 million as at end-June 2022, mainly to fund the working capital for steel production. The increase in shareholders’ equity to RM858.6 million as at end-June 2022 from RM720.8 million as at end-June 2021 was largely from the new shares issuance via rights issue exercise completed in September 2021. The bulk of the proceeds 
were used to fund working capital. Gross debt-to-equity (DE) ratio stood at 0.53x as at end-1H2022. The outstanding under the Sukuk Ijarah Programme stood at RM90.0 million as at end-June 2022, with the next repayment of RM40.0 million due on November 30, 2022.     

Rating outlook     
The stable outlook incorporates our expectation that Masteel’s financial metrics will remain broadly in line with the current levels over 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
  • Strengthening operational efficiency
Key risks
  • Managing raw material price and production cost 
  • Exposure to steel price volatility

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