Friday, Jul 20, 2007
MARC has affirmed the long term rating of Perwaja Steel Sdn Bhd’s (Perwaja) RM400.0 Million Murabahah Medium-Term Notes (MMTN) Programme at AID which reflects its strong position as a domestic direct reduced iron (DRI) producer, expectations for continued improvement in credit quality as the company benefits from higher steel prices and production volumes in addition to efficiency initiatives introduced by its new majority shareholder, Kinsteel Berhad (Kinsteel). Perwaja’s rating also takes into account its increasing integration within the Kinsteel Group and its status as a strategically important subsidiary of Kinsteel. Kinsteel has a long-term rating of AID from MARC in respect of its Islamic debt securities. These factors are however moderated by Perwaja’s significant legacy liabilities and considerable working capital requirements which have negatively impacted cashflow measures. The outlook for the rating is stable.
Perwaja became a 51% owned subsidiary of Kinsteel upon the completion of a strategic alliance agreement with Maju Holdings Sdn Bhd in September 2006. Since becoming a part of the Kinsteel Group, the company has benefited from improved inventory control, a wider distribution network and better access to scrap supply. The cost savings arising from these initiatives have translated into higher profits margins.
Perwaja is currently operating at targeted capacity utilisation levels. For the first half of 2007, the utilisation rate for Perwaja’s DRI facility was maintained at 89.3% (FY2006:79.5%) whilst its billet facility achieved a higher utilisation rate of 64.9% (FY2006: 41.8%).
Perwaja currently dominates DRI production in the domestic market. There are no other domestic DRI producers at present. Antara Steel Sdn Bhd is the only producer of a substitute product, hot briquetted iron (HBI). The capacity addition of Lion DRI Sdn Bhd’s new DR plant, which is expected to commence in the near future is not foreseen to have a material impact on Perwaja’s DRI sales in light of the still favourable supply and demand dynamics for DRI in the ASEAN market.
In FY2006, Perwaja registered revenue of RM1,182.1 million and a pre-tax profit of RM96.5 million (FY2005: RM1062.6 million revenue and RM103.1 million pre-tax loss) on account of improved operating profit margins which, in turn were driven by stronger steel prices and cost savings. The company recorded RM216.5 million negative cash flow from operations in FY2006, due to sizeable repayments of legacy liabilities which came up to RM207.0 million. Perwaja expects its cash flow from operations to turn positive in FY2007 with the continuous decline in pre-acquisition payables.
Rating stability is supported by the company’s commitment to improve its financial profile and expectations that the favourable pricing environment for steel would enable Perwaja to sustain its operating performance. Failure to generate the expected improvement in credit protection measures may cause downward rating pressure.
Perwaja became a 51% owned subsidiary of Kinsteel upon the completion of a strategic alliance agreement with Maju Holdings Sdn Bhd in September 2006. Since becoming a part of the Kinsteel Group, the company has benefited from improved inventory control, a wider distribution network and better access to scrap supply. The cost savings arising from these initiatives have translated into higher profits margins.
Perwaja is currently operating at targeted capacity utilisation levels. For the first half of 2007, the utilisation rate for Perwaja’s DRI facility was maintained at 89.3% (FY2006:79.5%) whilst its billet facility achieved a higher utilisation rate of 64.9% (FY2006: 41.8%).
Perwaja currently dominates DRI production in the domestic market. There are no other domestic DRI producers at present. Antara Steel Sdn Bhd is the only producer of a substitute product, hot briquetted iron (HBI). The capacity addition of Lion DRI Sdn Bhd’s new DR plant, which is expected to commence in the near future is not foreseen to have a material impact on Perwaja’s DRI sales in light of the still favourable supply and demand dynamics for DRI in the ASEAN market.
In FY2006, Perwaja registered revenue of RM1,182.1 million and a pre-tax profit of RM96.5 million (FY2005: RM1062.6 million revenue and RM103.1 million pre-tax loss) on account of improved operating profit margins which, in turn were driven by stronger steel prices and cost savings. The company recorded RM216.5 million negative cash flow from operations in FY2006, due to sizeable repayments of legacy liabilities which came up to RM207.0 million. Perwaja expects its cash flow from operations to turn positive in FY2007 with the continuous decline in pre-acquisition payables.
Rating stability is supported by the company’s commitment to improve its financial profile and expectations that the favourable pricing environment for steel would enable Perwaja to sustain its operating performance. Failure to generate the expected improvement in credit protection measures may cause downward rating pressure.