Press Metal Aluminium Holdings Bhd. Assigned #BB-# Preliminary Outlook Positive

Stocks and Financial Services Press Releases Monday October 16, 2017 17:33
SINGAPORE--16 Oct--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Oct. 16, 2017--S&P Global Ratings today assigned its 'BB-' preliminary long-term corporate credit rating to Press Metal Aluminium Holdings Bhd. (PMB), a Malaysia-based aluminum extrusion and smelting company. The outlook is positive. At the same time, we are assigning our 'BB-' preliminary issue rating to the proposed senior unsecured notes to be issued by Press Metal (Labuan) Ltd. PMB, its two smelting operating subsidiaries, and certain other subsidiaries, unconditionally guarantee the proposed notes.

Our preliminary rating is based on the expectation that PMB will use the proceeds from its proposed US$400 million notes to refinance outstanding debt. This will help the company maintain adequate liquidity after the note issuance. We believe the company's liquidity could come under pressure, weakening its credit profile, if the note issuance is less than US$400 million or if it does not materialize. The preliminary rating on the proposed notes is also based on the assumption that PMB's operating subsidiaries, Press Metal Bintulu Sdn. Bhd. and Press Metal Sarawak Sdn. Bhd., will unconditionally and irrevocably guarantee the notes.

The rating on PMB reflects the company's modest production and scale as an aluminum smelter and extruder, its single-asset and single-metal exposure to aluminum, and a limited record of operations at larger production levels. The company also has debt-funded its capacity expansion, and its cash flow adequacy ratios will remain sensitive to fluctuations in aluminum prices. PMB's sound cost position with low power costs and limited reinvestment needs in the operations support its debt reduction potential through 2019 and mitigate these constraints.

We regard PMB's scale and fairly narrow operating diversity as the main rating constraint. The company is a small aluminum producer, with a capacity of 760,000 tons and aluminum extrusion capacity of 160,000 tons. That's about 1% of the global aluminum capacity and multiple times smaller than other peers rated by S&P Global Ratings, such as Norsk Hydro ASA, Aluminium Corp. of China, or Vedanta Resources Plc. PMB's scale is unlikely to change materially over the next two to three years because it would need to source low-cost power to remain cost competitive. We also expect no major change to PMB's product range, which currently focuses on commodity aluminum products, including ingots, billets, and wire rod, for which barriers to entry are limited.

We expect PMB's production and cash flows to remain concentrated to its Bintulu and Mukah sites in Sarawak, with contribution of more than 80% through 2019. The high geographic and single-asset exposures affect the company's credit profile because it reduces earnings quality and predictability. In particular, operations are solely dependent on Sarawak Energy Bhd., the state electricity producer and sole electricity source for PMB, providing uninterrupted power. A state-wide power outage in 2013 led to a 50% decline in sales volume at the Mukah plant; it took nearly five months before full ramp-up could resume. We believe another outage of this magnitude is unlikely, given the additional power capacity built by Sarawak Energy since. A fire in 2015 also led to production shutdown of several weeks at the Bintulu plant. It generally takes several weeks before production can resume safely even after a short few hours of production shutdown.

We view PMB's single-metal concentration to aluminum as moderately credit negative. Aluminum prices are volatile, ranging from US$2,000 per ton in the fourth quarter of 2014 to below US$1,500 per ton for about 12 months between July 2015 and July 2016. However, PMB hedges the prices of part of its production every year, with about 75% of projected production in 2018 hedged at about US$1,860 per ton, and a further 15% of the 2019 production hedged. Hedging reduces the volatility of the company's profits and cash flows. We estimate it would take a sizable US$300 drop in aluminum prices over a full year for PMB's EBITDA to decline 30% from our base case, assuming the company hedges about 50% of its production annually. That compares with a US$150 per ton drop, a much more likely scenario, in the absence of hedging.

Despite the single-metal and single-site concentration risks, PMB's cost position is a supporting factor for the rating. We project the company's cash production costs, including overheads, at about US$1,400 per ton through 2019, at the bottom of the first quartile of the global cost curve. Unlike some of its peers, such as Norsk Hydro, PMB is not vertically integrated into power, bauxite, or alumina. However, its power cost is US$100-US$150 per ton less than peers because of a long-dated power purchase agreement with Sarawak Energy and with modest annual escalation.

We project PMB's EBITDA margin to exceed 15% in our pricing assumption through 2019, given its cost base. The company's quarterly EBITDA margin has been volatile historically, ranging from our estimate of about 12% when aluminum prices fell below US$1,600 per ton, to more than 20% currently. Nevertheless, the partial hedging of production volumes into 2019 provides visibility on absolute earnings and profit margins.

PMB built its smelting capacity at the expense of leverage over the past few years. Its debt-to-EBITDA ratio averaged about 6.5x between 2011 and 2013 following the commissioning of the first 320,000-ton aluminum capacity at the Bintulu plant. Although PMB repaid some debt in 2014 with cash flows from new capacity, it funded a second round of expansion in 2015 with debt and its debt-to-EBITDA ratio increased to nearly 4.0x in 2015 from 2.9x in 2014.

The positive rating outlook recognizes the prospect of declining debt over the next 12-18 months. We estimate that PMB could generate annual discretionary cash flows of Malaysian ringgit (MYR) 500 million on average over 2017-2019, assuming annual EBITDA of about MYR1.3 billion and combined spending and dividend outflows below MYR500 million.

The positive outlook reflects the prospects of strengthened credit metrics over the next 12 months and improved resilience to future fluctuations in aluminum prices if PMB continues to pay down debt with excess cash flows.

We may raise the rating within the next 12 months if PMB continues to pay down debt with excess cash flows, such that its ratio of funds from operations (FFO) to debt stays above 45% on a sustainable basis. An upgrade to 'BB' would also be contingent upon the company adopting a cautious approach to liquidity management, with permanently reduced short-term debt maturities and ample cash balances.

We may revise the outlook back to stable if PMB's trend of improving cash flow adequacy is interrupted and it becomes likely that the ratio of FFO to debt fails to approach 45% sustainably. This could materialize if: the company undertakes debt-funded expansion or acquisitions significantly beyond our base case, keeping net debt above MYR3 billion; aluminum prices fall sustainably below US$1,650/ton; production declines below 550,000 tons because of unplanned interruptions with no prospect of near-term recovery; or a combination of the three.


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