Press Releases MALAYSIAN RATING CORPORATION BERHAD (MARC) ASSIGNS RATINGS TO PERAK HANJOONG SIMEN SDN BHD’S RM698 MILLION AL-BAI BITHAMAN AJIL SECURED SERIAL BONDS (2001/2010)

Wednesday, Nov 14, 2001


The ratings of AA+ ID for Tranche I (RM370 million), A ID for Tranche II (RM50 million) and A+ ID for Tranches III (RM80 million) and IV (RM168 million) reflect the strength of irrevocable unconditional guarantees provided by a consortium of banks evaluated using the weak link approach. The BBB- rating of the non-guaranteed RM30 million Tranche V reflects the issuer’s stand-alone rating, recognising PHSSB’s vulnerability to industry and economic cycles and MARC’s expectation that overcapacity within the cement industry and the near-term anaemic demand for cement will restrain meaningful improvements in the company’s currently weak financial profile in the short term. Positive rating factors include PHSSB’s position as one of the larger integrated cement producers in the domestic cement industry and its competitive cost structure.

Aggressive capacity expansion during the boom time of the mid 90’s coupled with the economic downturn of 1997 has resulted in excess capacity within the domestic cement industry. The property overhang in the office and commercial space segments is expected to continue for a few more years and will likely hamper a quick recovery in the domestic demand for cement to pre-Asian crisis levels, notwithstanding continuing government efforts to stimulate the economy through public works spending. Export opportunity is viewed to be limited in the near future given the overcapacity in the region.

The domestic cement industry is dominated by the Malayan Cement Group which commands over 45% of the cement market. PHSSB, currently ranked fourth domestically, has existing cement and clinker production capacities of 1.6 million and 1.4 million tonnes per annum respectively, supplying 6.0% of the domestic cement market. The company is at the tail-end of an expansion programme, which when completed, will boost its cement and clinker capacities to 3.4 million and 3.0 million tonnes per annum respectively.

The proximity of PHSSB’s plant to the source of its raw materials allows cost-efficient transportation of the raw materials to the plant. Consequently, PHSSB’s average production cost of cement compares favourably among peers. The company’s favourable cost base suggests that among the domestic producers, PHSSB would be in a better position to manage possible pressures of adjusting to industry deregulation and increased competition from regional cement producers with the coming implementation of the Asean Free Trade Area in 2003.

Expanded industry capacity for cement and the Asian crisis caused PHSSB’s financial profile to weaken substantially in recent years. Revenue plunged by 47% in FY98 and continued to decline in FY99 before recovering by 30.5% in FY2000. While the price of cement is controlled by the Government, the large rebates extended by domestic producers in late 1998 and 1999 caused industry revenues to contract. Consequently, operating profit margin which had been on a downward trend since 1997 turned negative in FY99. Profitability was restored in FY2000 with the recovery of the construction sector and cessation of the practice of rebating in February 2000.

PHSSB’s debt levels have risen significantly over the past several years as a result of its capital spending on capacity expansion. While interest servicing capability remained sufficient, its debt servicing capability deteriorated markedly. Cash flow measures are projected to improve post FY2002, that is, after the completion of the capacity expansion. Nonetheless, MARC views PHSSB’s cash flow to be extremely sensitive to construction cycles. Gearing is currently high and could increase further in the near term given the weak underlying operating cash flow. The company’s financial flexibility to meet any unexpected liquidity needs is viewed as limited.