MARC has affirmed the rating of Antara Steel Mills Sdn Bhd’s (Antara) Islamic debt at AID  and revised the outlook to positive from stable. The rating affirmation reflects the strong recovery of Antara’s HBI operations in Labuan, which contributed substantially to the group’s bottom line following the setback from a prolonged unplanned plant shutdown in 2006. The positive outlook incorporates MARC’s anticipation of further improvements in Antara’s debt leverage and cash flow position attributable to the current buoyant domestic steel industry. Moderating factors include slower improvements in Antara’s billets and bars operations in Pasir Gudang. For financial year ended June 30, 2007 (FY2007), Antara’s Pasir Gudang plant achieved higher production levels, however operating profit margins remained thin. Additionally, rising raw material prices (e.g. scrap metal and iron ore) and operating costs may dampen operating margins.
 
In the near-term, growth in the domestic steel industry is expected to be sustained aided by the implementation of the Ninth Malaysia Plan while Antara’s Pasir Gudang plant is positioned to capitalise on expected demand from the Iskandar Development Region. Meanwhile, competition from China is expected to soften pursuant to the Chinese Government’s announcement on the levy of export duties to be imposed on certain steel products. Nevertheless, international scrap metal prices continue to rise; currently averaging USD310 per tonne as compared to USD250 per tonne a year ago. Iron ore prices are also expected to rise as China’s steel consumption is not showing signs of abating.

In FY2007, riding on the back of strong demand, Antara’s HBI operations operated at 102.3%, slightly above its optimum capacity (FY2006: 43.1%); while its billets and bars operations achieved improved production capacities of 92.5% (FY2006: 52.5%) and 53.3% (FY2006: 49.2%) respectively. The recent increase in the ceiling prices for steel is expected to further benefit Antara’s billets and bars operations while continuous lobbying by steel millers to the Government for an Automatic Pricing Mechanism will lead to further increases in selling prices.

On a consolidated basis, Antara’s revenue increased more than two-fold to RM1,855.6 million in FY2007 (FY2006: RM749.9 million) attributed to improved sales registered by both its HBI and billets and bars operations. Profits before tax also surged to RM228.9 million in stark contrast to the loss of RM81.9 million in FY2006. Operating profit contribution was however predominantly from its HBI operations (98.4%) with only a marginal contribution from its billets and bars operations.

Overall, Antara’s financial profile improved in FY2007 based upon significantly higher cash flows from operation of RM185.9 million, improved liquidity and  a reduction in its debt leverage ratio to 1.1 times (FY2006: 1.9 times). In accordance with the Islamic debt redemption schedule, Antara has to date successfully redeemed the Serial A and B tranches totalling RM100.0 million. However, MARC understands that the insurance claim arising from the plant shutdown in 2006 is still pending settlement, and expects that any settlement will have a positive effect on Antara’s immediate liquidity position.