01 May 2012

Malaysia Rating Corp downgrades Kinsteel Bhd debt notes rating on deteriorating financial performance, increased borrowings and weakening liquidity position from extending financial support to subsidiary Perwaja's loan stock issue

(KINSTEL opening stock price today (2.5.2012) was 45 sen)

Malaysian Rating Corporation (MARC) has lowered its ratings on Kinsteel Bhd's RM200mil debt notes while the outlook for the ratings was negative.

The ratings agency said on Monday the ratings involved the RM100mil Murabahah commercial papers/medium term notes programme (CP/MTN) and RM100mil Murabahah MTN programme to MARC-2ID/A-ID and A-ID from MARC-2ID/AID and AID respectively.

"The rating actions incorporate Kinsteel group's deteriorating financial performance on the back of raw material price volatility and subdued demand for steel products, increased borrowings and weakening liquidity position from extending financial support to fully subscribe to subsidiary Perwaja Holdings Bhd's loan stock issue," it said.

MARC said it had removed Kinsteel's ratings from MARCWatch Negative where they were placed on Feb 3, 2012.

The ratings agency said the negative outlook incorporated its concerns about Kinsteel's uncertain immediate prospects, which the group faced to strengthen its business and financial profile to a level that would commensurate with the current rating band.

"The ratings could be lowered if further deterioration in Kinsteel's financial metrics were to occur in the near term," it said.

For FY ended Dec 31, 2011 (FY2011), Kinsteel group posted an unaudited pre-tax losses of RM228.6mil mainly due to disproportionate increases in raw material costs, in particular iron-ore prices, relative to finished steel product prices, as well as impairment costs and higher financing costs of RM132.7mil (FY2010: RM123.6mil).

MARC noted the average purchase price of billets used in Kinsteel's downstream activities rose by 11.1% in FY2011 from the previous year while the average selling price of steel products rose 8.6%.

For FY2011, Kinsteel wrote-down inventories of RM94.2mil following the sharp decline in iron-ore price in 4Q2011.

MARC said operational cash flow (CFO) was positive over the last three years owing largely to reduced working capital utilisation due to declining production levels in light of persistently weak demand.

However, the group has increased its reliance on bank borrowings, particularly trade financing, which has risen by 70% from RM733.5mil in FY2007 to RM1.248.4bil in FY2011, to support stock build-up during the same period. In tandem with increased borrowings, Kinsteel group's leverage position as reflected by debt-to-equity (DE) ratio increased to 1.38 times in FY2011 (FY2010: 1.12 times).

"MARC expects the group's leverage position to worsen in the near term following the financing of its upstream expansion into construction of an iron ore concentration and pelletising plant by Perwaja Steel Sdn Bhd (Perwaja), which manufactures direct-reducing iron (DRI) and semi-finished steel products.

"Funding requirements for the plant are expected to be met from a combination of internally generated funds and term loans," it said.

Source: www.thestar.com.my


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