MARC has assigned a preliminary rating of AAA_IS(fg) to Malaysia Steel Works (KL) Bhd’s (Masteel) proposed RM130.0 million Sukuk Ijarah Programme with a stable outlook. The assigned 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.

Masteel’s standalone credit profile remains vulnerable to fluctuations in the price of steel, the cost of raw materials and regulatory changes. Given its relatively modest market position in the production of billets and bars mainly for local consumption, these factors have weighed on its profitability margins. At end-1Q2018, its combined total production capacity stood at 750,000 MT for billets and 700,000 MT for bars, achieving a rolling mill utilisation level of 74.6% for billets and 72.7% for bars (2016: 79.8%; 64.8%).

Masteel’s profitability has steadily improved over the last five-year period as output rose and product mix improved to include a higher proportion of bars which generate higher margin. The group has also benefitted from the implementation of duties on steel imports in September 2016 which has driven demand for locally produced steel. However, the recent slowdown in domestic construction and property activities has exerted some pressure on steel suppliers. Domestic bar prices peaked at RM2,750/MT in January 2018 before softening to RM2,445/MT in June 2018.

In 1H2018, the company recorded weaker gross and operating margins of 7.5% and 4.4%, mainly attributable to a recent increase in key feedstock cost coupled with lower local steel prices. Masteel expects its performance to remain under pressure over the near term with a gross margin of RM225/MT in 2018, 3% lower than the RM232 achieved in 2017.

As at end-1H2018, Masteel’s liquidity position remains modest with RM34.0 million in cash and equivalents and RM91.0 million in available credit facilities against short-term debt of RM285.8 million comprising mostly of bills payable and a term loan of RM32.5 million. The group’s working capital requirement has risen alongside an increase in production capacity. Between 2013 and 2017, Masteel’s total installed production capacity increased to 700,000 MT from 350,000 MT for bars and to 750,000 MT from 650,000 MT for billets. The expansion was mostly funded from internally generated funds. Its inventory days have increased to over 100 days, partly due to it holding a higher amount of scrap iron to offset rising input costs through larger purchases. Nonetheless, the company has improved its receivable days to below 40 days over the last three years.

Masteel’s gearing level is manageable, with debt-to-equity at 0.44 times and debt-to-EBITDA at 3.1 times. Given expectations of a moderate contraction in earnings on rising operating costs, MARC expects leverage to rise following issuance under this rated programme to 0.60 times debt-to-equity and between 3.5 to 4.0 times debt-to-EBITDA.

Noteholders are insulated from downside risks in relation to Masteel’s credit profile by 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:
Hari Vijay, +603-2717 2937/ harivijay@marc.com.my;
Wan Abdul Muiz Wan Abdul Ghafar, +603-2717 2939/ muiz@marc.com.my