MARC has affirmed the rating of BBB on integrated aluminium producer Press Metal Berhad’s (Press Metal) RM320.5 million Redeemable Convertible Secured Loan Stocks (RCSLS). The rating outlook is maintained at negative. The rating action reflects the difficult operating environment for aluminium manufacturers, the group’s continued weak liquidity position and its significant leverage position arising from the sizeable debt incurred to fund the construction of its smelting plants. 

MARC notes that Press Metal, which is involved in aluminium smelting through its Sarawak-based Samalaju and Mukah plants with capacities of 320,000 MT/pa and 120,000 MT/pa respectively and aluminium extrusion mainly in Peninsula Malaysia, continued to be affected by weak aluminium prices and excess global capacity. Average price declined by 8.7% year-on-year in 2013 and a further 4.9% to US$1,755/MT year-to-date. MARC views any aluminium price increase in the medium term to be constrained by industry overcapacity and a lack of supply discipline among smelters. In addition, the supply situation could be exacerbated should market distortions, arising from prevalent financing deals taking advantage of the current contango in the aluminium market, dissipate. Nonetheless, the long load out queues from London Metal Exchange-registered warehouses have enabled Press Metal to benefit from the physical premiums paid to smelters for immediate delivery of aluminium in addition to LME’s cash contract prices. The physical premiums have averaged US$314/MT year-to-date.

MARC notes the group’s tight working capital position given its net current liabilities stood at RM1,170.1 million as at the end of the first quarter of 2014 (1QFY2014). While this will be improved by the proceeds of US$160.6 million (RM522.7 million) from the 20% divestment in Press Metal Bintulu Sdn Bhd (PMBintulu), which owns the Samalaju plant, to Sumitomo Corporation group (Sumitomo), its liquidity position remains a major concern. The rating agency also observes the support from Sumitomo which had extended a US$25 million advance to part fund the restoration of the Mukah plant following a power outage in June 2013 that damaged the plant’s aluminium pots, resulting in a RM41.1 million write-down in FY2013.

The Mukah plant has resumed full operations in March 2014 and together with the higher operating capacity of the Samalaju plant will support Press Metal’s revenue growth going forward. The aluminum capacity expansion had been largely funded by significant borrowings which continues to weigh on Press Metal group. As at the end-1QFY2014, total borrowings including the rated RCSLS stood at RM2.59 billion, of which short-term borrowings amounted to RM1.57 billion. Proceeds from the part-divestment of PMBintulu will address its borrowings, reducing the group’s leverage from 1.82 times as at end-1QFY2014 to a pro-forma 1.12 times.

PMBintulu has also recently proposed to refinance the outstanding amount of its RM750.0 million syndicated term loans with facilities amounting to US$245.0 million which, in addition to providing a natural hedge to its revenue, is expected to trim financing costs by about RM15 million annually. Notwithstanding these measures, addressing its financial obligations would remain challenging in the near term for the group even though cash flow from operations (CFO) has improved. For 1Q2014, CFO was RM138.1 million compared to RM54.2 million in the corresponding period last year. Press Metal also posted a higher revenue of RM897.1 million in 1QFY2014 (1QFY2013: RM724.2 million) due mainly to an increase in the operating capacity at the Samalaju plant. While the quarter-on-quarter operating profit improved to RM74.3 million (1QFY2013: RM68.5 million), the operating profit margin decreased to 8.3% (1QFY2013: 9.5%) largely on lower aluminium prices.

The group redeemed 5% of the RCSLS in February 2014 with the next 5% redemption scheduled in August 2014. The outstanding amount of RCSLS is RM251.0 million as at July 2, 2014. MARC opines that the rating on the RCSLS would be downgraded should the group’s financial profile deteriorate on the back of a further decline in aluminium prices. The rating outlook could revert to stable if the aluminium industry dynamics improve and/or meaningful progress is made to address the group’s liquidity position. 
 
Contacts:
Ngiam Tee Wei, +603-2082 2268/ teewei@marc.com.my;
Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.