The ratings of AID/MARC-2ID and AID assigned to Kinsteel Berhad’s (Kinsteel) RM100 million Murabahah Commercial Papers/Medium-Term Notes (Murabahah CP/MTN) and RM100 million Murabahah Medium-Term Notes (MMTN) Programme respectively reflect the company’s proven track record  in the local steel industry in terms of its profit record, distribution network, access to scrap supply and the synergies to be derived from its proposed acquisition of Perwaja Steel Sdn Bhd (PSSB) and certain assets located in Gurun, Kedah comprising a beam and section mill, a bar and wire rod mill and 2 pieces of vacant land (Gurun Assets). The rating is however moderated by the cyclicality of the steel industry. Additionally, Kinsteel’s trade receivables have increased in FY2005 (in line with an increase in revenue), which has resulted in a negative operating cashflow position.

Kinsteel’s core business lies in the manufacturing and trading of steel bars and related steel products. It is one of the main producers of angle bars and has an added distinction of being one of the few U-channel bar producers in Malaysia. The group currently owns seven steel mills in the Gebeng Industrial area of Kuantan with an installed capacity of 500,000 metric tons and is currently commissioning its eighth mill, a bar and wire rod plant with a production capacity of 300,000 metric tons per annum.

As part of its expansion plans, Kinsteel had on 7 October 2005 entered into a conditional strategic alliance agreement (SAA) with subsidiaries of Maju Holdings Sdn Bhd (Maju) namely Maju Rebar Coatings Sdn Bhd, Maju Steel Centre Sdn Bhd, Perwaja Rolling Mill & Development Sdn Bhd and PS Water Sdn Bhd for the acquisition of a 51% shareholding interest in PSSB and the Gurun Assets from these subsidiaries, with Maju collectively holding the remaining 49%. The enlarged group will transform into one of the largest local integrated steel players covering upstream (manufacturing of DRI, billets, beam-blanks and blooms), midstream (manufacturing of H-beams and I-beams) and downstream products (manufacturing of wire rods, wire mesh, steel bars and nails). PSSB’s Direct Reduction (DR) and steel making plants are situated in Kemaman, Terengganu, on the east coast of Peninsular Malaysia.

Kinsteel expects its bar and wire rod mill to boost revenues and is projecting a substantial contribution from the new division starting in FY2007, amounting to approximately one-third of the Group’s bottom line going forward. With the higher gross profit margin expected from the bar and wire rod plant, Kinsteel has assumed an average gross profit margin of 8.5% over the tenure of both the Programmes.

Including PSSB and the Gurun Assets, Kinsteel has projected an average and minimum FSCR of 7.21 times and 2.28 times respectively. Based on the projections Kinsteel is expected to meet the covenanted FSCR of 1.25 times over the tenure of both the Programmes. Based on its pro-forma balance sheet as at 31 December 2005, the group’s debt to equity ratio is expected to be at 1.08 times; well within the covenanted ratio of 1.75 times upon issuance of the RM100 million Murabahah CP/MTN and RM100 million MMTN, issuance of an additional 60 million shares at RM1.36 per share and recognition of negative goodwill amounting to approximately RM353.9 million.

Kinsteel has recorded consistent profits over the past five years and its unaudited  first quarter FY2006 results showed a higher pre-tax profit of RM7.5 million (Comparative quarter: RM4.6million) due to recovering steel prices. With a relatively stable outlook projected for the steel industry in the near term, the company’s prospects for a better performance in 2006 appear favourable.