Press Metal Aluminium Holdings Bhd (Press Metal) is PMB Tech
KUALA LUMPUR: S&P Global Ratings has lowered the ratings outlook for Press Metal
Aluminium Holdings Bhd from positive to stable on slower deleveraging while it affirmed its 'BB-' ratings.
In its rating outlook issued on Tuesday, the ratings agency said opportunistic growth investments and working capital outflows have consumed Press Metal's free cash flows, slowing down debt reduction.
“In addition, Press Metal's continued reliance on short-term debt has undermined the company's liquidity position,” it said.
S&P Ratings also affirmed its 'BB-' issue rating on the senior unsecured notes issued by Press Metal (Labuan) Ltd. Press Metal, its two smelting operating subsidiaries, and certain other subsidiaries unconditionally and irrevocably guarantee the notes.
Press Metal is a Malaysia-based aluminum extrusion and smelting company.
The ratings agency also anticipated Press Metal's debt will be much higher than its previous expectations – at about RM3.5bil for the rest of 2018 and 2019.
“We had expected its gross debt to reduce to RM2.7bil in 2018 and RM2.0bil by 2019. In addition, its working capital needs have further increased its dependence on short-term debt, to RM1.2bil as of June 2018 from RM900mil in December 2017.
“Press Metal's working capital needs, and hence, its short-term debt, are unlikely to rise. Still, the larger debt levels have reduced the scope for a stronger position in Press Metal's cash flow leverage,” it said.
S&P Ratings said the stable outlook reflected its expectations Press Metal will use its discretionary cash flow to gradually strengthen its liquidity, while its healthy operating performance should sustain the company's ratio of funds from operations to debt near 35%.
“We revised the outlook on Press Metal to stable to reflect the company's slower deleveraging and continued increase in working capital and short-term debt.
“PMB has used its improving cash flows to further invest in acquisitions, working capital, and pay out dividends, instead of reducing debt – a trend that we expect to continue,” it said.
It said the smelter's working capital requirements have been significant, which “we don't expect to unwind immediately”.
The company invested RM980mil over 2017 and RM320mil during the first half ended June 30, 2018, for working capital.
S&P Rating said these amounts were a substantial portion of Press Metal 's funds from operations during the two periods, which were RM1.2bil and RM700mil respectively.
“As a result, the company didn't reduce its short-term debt, contrary to our previous expectations.
“We believe such elevated working capital was partly due to higher metal and raw material prices. Still, a good share of Press Metal 's working capital is due to an inventory build-up and longer credit periods for customers.
As a result, Press Metal 's cash conversion cycle extended to 69 days by June 2018 from 46 days in March 2016.
It pointed out that although some unwinding of working capital is possible, it does not expect an immediate and large release of cash from such unwinding. As such, cash availability to reduce debt is likely to be low.
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