KUALA LUMPUR (Oct 16): Moody's Investors Service has assigned a Ba3 corporate family rating (CFR) to Press Metal Aluminium Holdings Bhd. It also assigned a Ba3 rating to the proposed senior notes due in 2022.

Moody’s said the outlook of the notes is stable, with bulk of the proceeds raised will be used to repay the existing indebtness.

"The Ba3 CFR reflects Press Metal's low-cost aluminum smelting capabilities, supported by a long-term power purchase agreement with Sarawak Energy, solid EBITDA (earnings before interest, tax, depreciation andf amortisation) margins, conservative financial policies, and low financial leverage with debt/EBITDA, expected to be around 2.0x in 2017," Moody's Vice President and Senior Credit Officer Brian Grieser said in a statement today.

As for the stable outlook, Moody’s said it is expecting Press Metal to generate a modest revenue growth, coupled with EBITDA margins in the mid-to-high teens over the next 12 to 18 months.
 
The agency added: “Capital expenditures are expected to be largely focused on the maintenance of existing facilities and efficiency improvements, which will facilitate free cash flow generation and debt reduction over this period.”

The agency noted that Press Metal has generated EBITDA margins in the range of mid-to-high teens, since the last three years.
 
“The company benefits from a low cash cost per ton relative to other aluminum producers, driven primarily by its access to low energy tariffs as part of its 25-year power purchase agreement with Sarawak Energy Bhd,” it added.
 
Going forward, Moody’s expect Press Metal to maintain its cost advantages, which partially mitigate the price risk on its aluminum sales.

“Margins also benefit from low employee and logistic costs, and the correlation between the price of aluminium and alumina, which represents the largest component of its cash costs,” the rating agency added.

As for Press Metal’s CFR, Moody’s said it also incorporates its small scale relative to global competitors, limited operational track record, and exposure to the volatility in the prices of aluminum and raw materials.

Moody’s added that its ratings on Press Metal reflect the geographic concentration, with all its aluminium smelting capacity located in Sarawak and its dependence on Bakun Dam's hydroelectric power plant — operated by Sarawak Energy — to supply all the power needs of its two smelter locations.

The agency also said Press Metal has a longstanding relationship with Japan’s Sumitomo Corp as an investor, customer and marketer of its products, which is a positive credit consideration.

Currently, Sumitomo — the largest purchaser of its aluminum production — owns a 20% share in both Press Metal’s two subsidiaries: Press Metal Bintulu Sdn Bhd and Press Metal Sarawak Sdn Bhd.

Hence, the proceeds from Sumitomo's equity contributions have supported Press Metal’s construction of the aluminum smelting facilities in a financially conservative manner, Moody’s added.

"We view the ownership by Sumitomo and its level of aluminum purchases as credit positive for Press Metal. We expect Sumitomo to remain a supportive shareholder and influence to Press Metal, to manage its balance sheet and growth strategy in a conservative manner," Grieser added in the statement.

In the longer term, Moody’s said the increased production capabilities and growth in its value-added product sales, support the upgrade of the rating grade, assuming EBITDA margins are consistently above 20% and leverage is maintained below 2.0x.

“An upgrade is unlikely in periods of significant investment, where free cash flows are negative,” the statement said.