MARC has placed its AID ratings on Antara Steel Mills Sdn Bhd’s (Antara) RM500 million Bai’ Bithaman Ajil Islamic Debt Securities (BAIDS) Programme on MARCWatch Negative. The rating action follows recent confirmation from Antara that its Labuan-based Hot Briquetted Iron (HBI) plant had remained shut down since the completion of its scheduled maintenance in October 2008. The MARCWatch Negative placement reflects concerns as to the impact of the extended plant closure and prevailing weak demand for HBI on Antara’s profitability, as well as liquidity position. Antara’s decision to halt production due to steep declines in steel prices and weakened demand is consistent with that being adopted by international steelmakers who have also been scaling back on production and shutting down mills to stem a build-up in inventory. As at end-September 2008, Antara showed a significant inventory build-up of RM1.13 billion.

MARC believes that the local steel industry is going through a challenging period and is concerned with the weak local demand for steel as well as market conditions which will remain highly uncertain going forward. Local steelmakers had to contend with record high raw material prices, namely scrap and iron ore in the first half of 2008 and subsequently the rapid downward correction of steel prices, forcing them to make provisions for inventory writedowns. Compounding woes have been the liberalisation of the local steel market in June 2008, which has resulted in heavy competition from cheaper steel imports. 

The Labuan plant shutdown is expected to impair Antara’s profitability significantly in FY2009. Antara’s revenue and profit before tax in the previous quarter ended September 30, 2009 (1QFY2009) stands at RM556.1 million and RM126.7 million respectively, of which Antara’s HBI operations contributed RM289.8 million and RM156.3 million in revenue and profit before tax respectively. The lower profits for 1QFY2009 were due to RM29.6 million in losses from its plant in Pasir Gudang, Johor, that produces steel bars and billets. Additonally, Antara has yet to make any provisions for inventory writedowns which MARC estimates to be between 20-25% of its total inventory value based on the provisions by other local steelmakers, although the plant shutdown should prevent any further build-up in inventory.

Antara’s next scheduled repayment of its BAIDS is on August 28, 2009 for a sum of RM90.0 million, which has already been earmarked from its sizeable cash balance of RM216.6 million as at end September 2008. The current total outstanding amount of the BAIDS is RM330.0 million and the company does not have any other outstanding borrowings as its purchases are financed by trade payables. However, Antara’s substantial net payables of RM430 million as at end September 2008 is expected to result in significant cash outflow and weaken its credit protection metrics. As at September 30, 2008, Antara’s DSCR remains at 3.32 times having benefited from a bullish steel market in 2007 and first half of 2008.

The ratings will remain on MARCWatch Negative pending discussion with management on the financial impact of the extended shut-down of the Labuan HBI plant and operating initiatives by the company to mitigate current weak market conditions. The ratings could be lowered if Antara’s coverage measures and liquidity show material erosion to the extent its financial profile no longer remains appropriate for the rating.

Contacts:  
Khairul Muzamel Perera 03-2090 2247/ kevinkhairul@marc.com.my;
Ruben Khoo 03-2090 2265/ rubenkhoo@marc.com.my;
Jason Kok 03-2090 2258 jason@marc.com.my