Thursday, February 10, 2011

MARC affirms rating for Perwaja Steel RM400m debt notes but outlook revised to negative

KUALA LUMPUR: Malaysian Rating Corporation Bhd affirmed the rating of Perwaja Steel Sdn Bhd's RM400 million murabahah medium term notes at A ID but the rating outlook was revised to negative from stable.

'The outlook revision incorporates the recent deterioration in Perwaja's operating performance, and continuing pressure from lower volumes and rising input costs,' it said on Thursday, Feb 10.

MARC said it was concerned about Perwaja's capacity to manage its liquidity position through its industry cyclical trough, given its high debt leverage and significant annual debt maturities.

The rating agency said the rating also incorporated the importance of Perwaja's upstream steel operations to its parent company, KINSTEEL BHD [] and assumed continued commitment of Kinsteel to Perwaja.

Perwaja is a major domestic producer of direct-reduced iron (DRI) and semi-finished steel products such as billets

However, the company had been affected by declining demand in line with the government's stimulus spending programme in fiscal 2010 tapering off, exacerbated by rising raw material costs.

MARC highlighted concerns about Perwaja's weak financial performance and its persistent operating cash flow deficits.

For nine months to Sept 30, 2010 (9MFY2010), Perwaja registered lower revenue of RM1,108.8 million (9MFY2009: RM1,160.4 million) and a pre-tax loss of RM3.6 million (9MFY2009: -RM155.2 million). Perwaja has been beset by low capacity utilisation rates, which averaged at 55.4% for its 1.5 million tonnes DRI plant capacity and 67.7% for its 1.3 million tonne billet production capacity in 9MFY2010.

'The slowdown in demand has also contributed to the company's significant build-up in inventory to RM874.3 million during the period (FY2009: RM623.5 million), or 205 days of inventory (FY2009: 153 days),' it said.

MARC pointed out that for the third quarter ended Sept 30, 2010 (3QFY2010), the company recorded'' revenue of RM270.6 million versus RM373 million 1QFY2010 and RM465.1 million in 2QFY2010 respectively, marking its third consecutive quarter of decline.

Meanwhile, the price of iron ore has been on an uptrend, rising from US$132.50 tonne in January 2010 to US$169.50 tonne end-November 2010, exerting downward pressure on its operating margins.


'MARC does not envisage Perwaja's performance to improve in 4QFY2010. While MARC believes that improvement in financial performance could be driven by a recovery in domestic steel consumption, this is only likely to occur in the second half of 2011 when the projects under the government's Economic Transformation Plan are rolled out,' it said.

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