MARC has affirmed its ratings of Kinsteel Berhad’s (Kinsteel) RM100.0 million Murabahah Commercial Papers/Medium Term Notes (Murabahah CP/MTN) and RM100.0 million Murabahah Medium Term Notes (MMTN) Programmes at MARC-2ID/AID and AID respectively. Concurrently, MARC has revised its rating outlook on the ratings to stable from developing.

The revised outlook stems from expectations that the credit metrics at Kinsteel holding company level and on a consolidated basis will improve to levels that are more in line with the current ratings in the near- to medium-term as Kinsteel and its core ultimate subsidiary Perwaja Steel Sdn Bhd (Perwaja) focus on reducing debt from free cash flow, aided by a recovery in steel demand and steel prices. The stable outlook also assumes that there will be no significant debt-funded capital investments unless fully supported by additional revenues. Any significant adverse deviations from expectations would likely result in downward pressure on the ratings.

The affirmed ratings continue to reflect the group’s competitive business profile as one of the largest long steel producers domestically, with leading positions in certain domestic steel bar segments, billets, and direct reduced iron and an established distribution network. Moderating the ratings would be the negative working capital position Kinsteel continues to maintain, the fairly high debt levels and associated debt service obligations at holding company level and Perwaja. The ratings also consider the cyclical nature of steel consumption and demand and the extent to which the steel industry’s performance is sensitive to economic activity and government stimulus measures.

Kinsteel is principally involved in the manufacturing and trading of long steel products. The company has a strong domestic market position in steel bars and has a controlling interest in upstream steel producer Perwaja through a 37% stake in Perwaja Holdings Berhad (PHB). MARC views the strategic and operational ties between Kinsteel and Perwaja as strong as Kinsteel is a user and seller of Perwaja’s output.

For financial year ended December 31, 2008 (FY2008), Kinsteel’s revenue at holding company level was relatively flat compared to the previous year at RM1.07 billion (FY2007: 1.05 billion) while pre-tax profit declined by 12% to RM29.70 million (FY2007: RM33.76 million). Consolidated results for FY2008 were weaker with a pre-tax profit of RM10.3 million compared to holding company level results which had benefited from a RM62.07 million gain on disposal of investment in subsidiary. The realised capital gain arose from the sale of PHB shares by Kinsteel upon the listing of PHB on the Main Board of Bursa Malaysia. Results at holding company and group levels were negatively affected by a sharp decline in pricing for steel products in the fourth quarter of 2008, which resulted in large inventory write-downs and significant pressure on operating margins.

Consolidated interim results for the nine-month period ended September 30, 2009 (9MFY2009) showed a 26% decline in revenue to RM1.54 billion against the preceding year’s corresponding period (9MFY2008: RM2.08 billion) and a pre-tax loss of RM150.39 million (9MFY2008: pre-tax profit of RM385.6 million). However, for its third quarter ended September 30, 2009 (3QFY2009), the group reported a turnaround with pre-tax profit of RM16.94 million (2QFY2009: pre-tax loss of RM74.0 million) on revenues of RM457.68 million (2QFY2009: RM639.12 million). The group recorded positive cash flow from operations (CFO) of RM147.4 million for the nine months to September 30, 2009 (9MFY2008: -RM44.42 million) as a result of lower working capital requirements with raw material prices receding from high levels in mid-2008. Free cash flow also turned positive to RM40.1 million compared to a deficit of RM121.3 million for 9MFY2008, notwithstanding capital expenditure of RM90.7 million for the period. Going forward, a focus on working capital management and lower fixed capital investment needs should enable the group to generate a fair amount of free cash flow. MARC expects the free cash flow to be used for debt reduction in light of the group’s fairly heavy annual MMTN repayments amounting to RM60 million, of which RM10 million relates to Kinsteel and the balance RM50 million to Perwaja.

Contacts: 
Ruben Khoo, 03-2090 2265 / rubenkhoo@marc.com.my;
Francis Xaviour Joe 03-2090 2279 / fxjoe@marc.com.my;
Rajan Paramesran 03-2090 2233 / rajan@marc.com.my