MARC has affirmed its rating of AAA_IS(fg) on Antara Steel Mills Sdn Bhd’s (Antara) RM300.0 million Sukuk Mudharabah Programme with a stable outlook. The affirmed rating and outlook are based on the unconditional and irrevocable financial guarantee insurance provided by Danajamin Nasional Berhad (Danajamin) on which MARC has an insurer financial strength rating of AAA/stable and long-term counterparty credit rating of AAA/stable.

Antara’s standalone credit profile has improved marginally in the nine-month period ended March 31, 2017 (9MFY2017), on the back of a higher capacity utilisation rate at its hot briquetted iron (HBI) operations in Labuan in line with higher steel prices. The Labuan plant’s capacity utilisation rate increased significantly to 74.3% in 9MFY2017 (9MFY2016: 42.0%). Its Pasir Gudang plant’s performance, however, continued to deteriorate since the shutdown of its billet-producing facility in December 2015, while its bar-producing facility registered a low utilisation rate of 11.9%, partly caused by difficulties faced in sourcing billets in the open market. Notwithstanding the foregoing, the recent upward trend in steel prices has prompted Antara to start producing billets, which would concurrently aid the production of steel bars.

For the unaudited 9MFY2017, Antara recorded revenue increase of 5.3% y-o-y to RM493.6 million and a profit after tax of RM43.5 million after three consecutive years of losses since FY2014. In addition to overall positive contributions from its Labuan plant, profitability was supported by a one-off receipt of insurance claims from an accident at the jetty in Labuan in 2013 and from the sale of by-products. In the near term, MARC expects better operating performance when the billet facility resumes operations, although profitability is expected to be lower in the absence of a one-off income. The rating agency also notes that receivables from Megasteel Sdn Bhd and Lion DRI Sdn Bhd were fully impaired in FY2016.

Cash flow from operations (CFO) as well as cash flow coverage ratios improved in 9MFY2017. Working capital is largely managed through cash-collateralised trade facilities for bank guarantees and bankers’ acceptance as well as letters of credit issued in favour of third parties. Although this restricts Antara’s use of its cash, MARC considers this arrangement as facilitating the cash conversion cycle and that the company’s liquidity is manageable. At end-9MFY2017, cash reserves stood at RM116.9 million, about RM65.4 million of which was applied to repay the instalment under the rated sukuk on June 28, 2017. The final sukuk instalment of RM60.0 million is due on June 28, 2018.

Noteholders are, insulated from the downside risks in relation to Antara’s credit profile from the guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Contacts:
Wan Abdul Muiz Wan Abdul Ghafar, +603-2717 2939/ muiz@marc.com.my;
Yap Lai Ken, +603-2717 2947/ laiken@marc.com.my.