MARC Ratings has affirmed its rating of AAA_IS(bg)  rating on Malaysia Steel Works (KL) Bhd’s (Masteel) RM130.0 million Sukuk Ijarah Programme guaranteed by Bank Pembangunan Malaysia Berhad (BPMB) with a stable outlook. The affirmed rating and outlook are based on MARC Ratings’ assessment of the credit strength of BPMB (AAA/Stable).

Rationale    

On a standalone basis, 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 improving operational efficiency from investment in production technology. The group is exposed to price volatility in terms of both material and product prices, which could pressure margins. 

In 1H2023, revenue grew by 4.5% y-o-y to RM934.3 million on higher sales volume. The group manufactures and markets high-tensile steel bars and prime steel billets, with the domestic market continuing to constitute the bulk of revenue at about 96% in 2022 (2021: 91%). Operating profit margin, nevertheless, contracted in 1H2023 to 1.8% (2022: 2.6%) on lower steel bar prices (down by 5.3% y-o-y to RM3,690/MT on average) as well as higher input costs. Despite some easing in recent months, raw material costs remained elevated compared to historical levels, which could continue to weigh on margins. 

Total debt was largely unchanged at RM482.2 million as at end-June 2023 (2022: RM471.4 million), mainly composed of bill payables for working capital. Gross debt-to-equity (DE) and net DE ratios stood at 0.56x and 0.44x as at end-1H2023. Masteel had RM100.5 million of cash as at end-June 2023, more than sufficient to meet its upcoming RM50.0 million notes maturity under the rated programme on November 30, 2023.

The stable outlook is premised on BPMB maintaining its mandated role as a development financial institution (DFI) for which there is a high likelihood of support from the government to the bank, if required.

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