Islamic Finance 

MARC affirms AAAIS(fg) rating on Masteel’s RM130.0 million guaranteed sukuk ijarah programme

| 06 August, 2019

MARC has affirmed its AAAIS(fg) rating on Malaysia Steel Works (KL) Bhd’s (Masteel) RM130.0 million Sukuk Ijarah 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 issued 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 steel price, fluctuating cost of raw materials and increased competitive pressures in the Malaysian market. Given its relatively modest market position in the production of steel billets and steel bars, which are mainly for local consumption, these factors have weighed on its profitability margins.

MARC notes that the challenging conditions in the domestic construction and property sectors have exerted pressure on steel suppliers. This was further exacerbated by the entrance of a major player in the steel sector in October 2018 which led to a price war resulting in domestic steel bar prices declining to RM2,225/MT by end-December 2018 (January 2018: RM2,750/MT). Against this background, Masteel has increased its output and improved its product-mix to include a higher proportion of steel bars which generate higher margins compared to steel billets. For 2018, steel bar sales accounted for 87% of Masteel’s total revenue of RM1.5 billion.

During 2018, the group recorded a weaker operating margin of 1.4%, mainly attributable to a decline in gross steel bar margins, coupled with impairments in inventory and higher administrative expenses. Profit before tax declined to RM4.8 million. For 1Q2019, Masteel continued to face weakening profitability, recording operating losses of RM11.4 million. MARC views that it would be challenging for Masteel to turnaround its performance over the near term.

Masteel’s liquidity position remains weak with RM35.7 million in cash and cash equivalents, against a short-term debt of RM297.6 million comprising mostly bills payable at end-1Q2019. Its working capital requirement has risen alongside an increase in sales volume and higher cost of raw materials. Inventory days have increased to over 150 days, partly due to holding a higher amount of scrap steel to offset rising input costs through larger purchases. Nonetheless, the group has improved its receivable days to below 40 days over the last three years. Masteel’s investments in the more efficient induction furnaces have also somewhat prevented the group from incurring larger operating losses.

Masteel’s gearing level as reflected by its debt-to-equity (DE) ratio of 0.59x remains moderate at end-2018. However, MARC expects Masteel’s DE to rise between 0.70x and 0.80x over the next two years. This is based on expectations that additional borrowings will be taken for the purchase of a second induction furnace and to bridge the funding gap due to margin compression.

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: Meyresh Vignaswaran, +603-2717 2945/; Lim Hui Boon, +603-2717 2959/


August 6, 2019


[This announcement is available on MARC’s corporate website at]


This communication is provided by Malaysian Rating Corporation Berhad (MARC) based on information believed by MARC to be accurate and reliable as derived from publicly available sources or provided by the rated entity or its agents. MARC, however, has not independently verified such information and makes no representation as to the accuracy or completeness of such information. Any assignment of a credit rating by MARC is solely to be construed as a statement of its opinion and not a statement of fact. A credit rating is not a recommendation to buy, sell, or hold any security.


© 2019 Malaysian Rating Corporation Berhad