The rating agency said on Tuesday it lowered our ratings on Press Metal because the company's growth aspirations make debt reduction and more prudent funding management less plausible until 2021 at the earliest.
“At the same time, we believe Press Metal's higher debt over the next 12 to 18 months reduce its headroom to absorb volatility in aluminum and alumina prices,” it said in a statement.
S&P pointed out Press Metal's growth appetite would likely result in higher capital spending for raw material security over the next 12 to18 months.
“We expect the company to partly fund the capital spending and investments with debt after its operating cash flows are used up.
“Meanwhile, Press Metal 's operating performance is exposed to volatility in aluminum and alumina prices due to global growth concerns and trade frictions,” it said.
S&P Global Ratings believed Press Metal management's growth aspirations are likely to persist beyond the planned investments until 2021.
“We understand that there are limited investments prospects. However, we believe the company's comfortable leverage from the management's perspective and availability of free operating cash flows, especially starting 2021, will trigger further growth investments. The potential of significant debt reduction is therefore low beyond 2021.
“We expect Press Metal's cash flow leverage to weaken over the next 12 to 18 months owing to a rise in growth investments in recent months. The company announced in August 2019 the development of phase 3 of its Bintulu plant in Samalaju, Sarawak.
“The brownfield development will add 320,000 tons of smelting capacity to Press Metal's current capacity of 760,000 tons per annum. PMB has also secured a 15-year power purchase agreement (PPA) with Sarawak Energy Bhd. (SEB) for 500 megawatts (MW) of electricity, which will power Press Metal's planned expansion.
“The power tariffs are competitive and will keep the company's operating economics attractive. The land for the Bintulu expansion is already available to Press Metal,” it said.
S&P Global Ratings pointed out Press Metal's single-site concentration will remain because the Bintulu plant will now account for about 90% of the company's smelting capacity.
With total smelting capacity of one million tons per annum (mtpa), Press Metal will still have a moderate scale in a global comparison.
“With the commissioning of the Bintulu expansion likely in late 2020, we expect the plant to ramp up in 2021 and make full contribution from 2022.
“Press Metal's investment for capacity expansion is likely to be about RM1.2bil (US$300mil) until 2021. The company will also have to make working capital investments commensurate with ramp-up requirements.
“Once commissioned, we expect about RM600mil in incremental EBITDA annually, with EBITDA per ton of US$450-US$475, in line with the historical average,” it said.
The rating agency also said Press Metal plans to acquire a 25% stake in PT Bintan Alumina Indonesia (PT BAI), an alumina refinery under construction, to secure its raw material needs.
The purchase consideration is likely to be about RM1.2bil (US$300mil). PT BAI will construct a 2 mtpa alumina facility over two phases, which are likely to be completed by mid-2021.
This investment follows Press Metal's acquisition of an effective 5% stake in Australian alumina producer Worsley Alumina in early 2019 for a similar consideration.
“With the stake in PT BAI, Press Metal is looking to tie up a large part of PT BAI's alumina production in long-term purchase contracts, potentially with a cost-plus-margin structure. While this investment could help Press Metal secure alumina at predictable costs, the economic benefits are at least two years away.
“We believe investments for Worsley, PT BAI, and the new smelting capacity will total about RM3.5bil. Of this, at least RM1.2bil will be debt-funded, pushing up the debt to RM4.2bil to RM4.6bil by end-2020.
“Our EBITDA expectation over 2019 is RM1.2bil, rising to RM1.5bil in 2020 as aluminum prices improve and cash flows benefit from softer alumina prices. Our key leverage ratio of funds from operations (FFO) to debt is likely to stay near 30% until the end of 2020,” it said.
S&P Global Ratings said an improvement in Press Metal's leverage was likely only toward the second half of 2021, when the new capacity will contribute to cash flow.
The company's working capital outflows have also surprised on the negative side, resulting in more than RM1.2bil in outflows over the past eight or so quarters. Overall, management's stated intent of deleveraging remains undelivered over the past two years.
“We expect Press Metal's operating performance in 2019 to stay largely in line with our expectations, although the first-half performance lagged a bit,” it said.
Press Metal's EBITDA was RM500mil in the first half of the year.
The rating agency anticipates aluminum price to trend up over the next two years while alumina price should stay soft, at 17%-18% of aluminum price.
This will boost Press Metal's EBITDA to RM1.5bil in 2020, with further gains likely following new capacity additions. However, global growth concerns and trade-related friction could weigh on aluminum prices.
“The stable outlook on Press Metal reflects our expectation that the company's FFO-to-debt ratio will average near 30% over the next two to three years as the company accelerates its debt-funded growth investments. We also believe the company's reliance on short-term debt is unlikely to reduce in the period.
“We could lower the rating if Press Metal does not moderate the pace and magnitude of its investments, so that its FFO-to-debt ratio approaches 20% on a sustained basis. Continued exposure to high levels of short-term debt could also add pressure on the rating.
“We may raise the rating if Press Metal ramps up new capacity and starts to benefit from its vertical integration in alumina, such that the FFO-to-debt ratio remains close to 35%. A higher rating would depend on the company adopting a prudent approach to growth and working capital investments, such that it has stronger cash flow leverage and less aggressive funding management,” it said.
Press Metal is a Malaysia-based aluminum extrusion and smelting company, with operations mainly in Malaysia and China. It is the largest aluminum producer in Southeast Asia, with smelting capacity of 760,000 mtpa and extrusion capacity of 210,000 mtpa.
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