MARC has affirmed the rating of Perwaja Steel Sdn Bhd’s (Perwaja) RM400.0 Million Murabahah Medium Term Notes (MMTN) Programme at AID and revised its rating outlook to stable from developing.

The affirmed rating and revised rating outlook reflects MARC’s expectations of restored profitability and cash flow generation with the improving steel price environment. Perwaja’s financial results for the nine months ending September 30, 2009 (9MFY2009) had been significantly affected by an earlier downturn in steel prices which had lasted from the third quarter of 2008 to the second quarter of 2009. Perwaja had earlier recorded a pre-tax loss of RM168.2 million for the six months ending June 30, 2009, which eroded its equity base to RM921.8 million as at 9MFY2009 (FY2008: RM1.05 billion). While Perwaja’s three quarters of consecutive losses since the fourth quarter of financial year 2008 (4QFY2008) has eroded its margin of safety at the current rating level, MARC expects Perwaja to rebuild its liquidity position and restore its key financial measures to return to levels more consistent with its current rating over the next two years, aided by a recovery in steel demand and steel prices, and improved working capital management. The stable outlook also assumes that there will be no significant increase in leverage at Perwaja to fund additional capital investments in the next 12 to 18 months unless fully supported by additional revenues.

Perwaja is one of the largest producers of direct-reduced iron (DRI), a feedstock in steelmaking, with an annual capacity of 1.5 million metric tonnes. In addition, Perwaja also produces semi-finished steel products such as bars and billets with an annual capacity of 1.3 million metric tonnes. With Kinsteel Bhd’s (Kinsteel) acquisition of a majority stake in the company in 2007, whereby Perwaja’s upstream steel production capabilities complement Kinsteel’s downstream steel operations, MARC expects greater operational efficiencies across the group from the recent streamlining of management between both companies.

Perwaja turned around with a pre-tax profit of RM13.1 million in 3QFY2009 from a pre-tax loss of RM94.9 million in the previous quarter following destocking of its inventory purchased at pre-crisis prices with gross profit margins normalising to 13.2% (3QFY2008: 13.3%). Its cash flow from operations has also improved in 9MFY2009 to RM96.8 million (9MFY2008: RM55.8 million) on account of lower working capital requirements. MARC expects cash flow from operations to benefit from reduced inventory levels as it works down its sizeable inventory of RM537.4 million and inventory holding period of 140 days to pre-downturn levels of around 90 days. However, based on its historical free cash flow, which has been negative or flat, coupled with principal repayments of RM50 million annually until 2013 and RM40 million and RM20 million in 2014 and 2015 respectively, any major capital expenditure exercise going forward is likely to incur additional debt. Perwaja’s debt-to-equity ratio has risen to 0.73 times as at end-9MFY2009 (FY2008: 0.67 times), notwithstanding that total interest bearing borrowings have come down to RM669.5 million (FY2008: RM707.7 million) following its latest repayment of RM50 million on September 30, 2009.

Contacts:
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my;
Jason Kok 03-2090 2258/ jason@marc.com.my;