KUALA LUMPUR: Moody’s Investors Service has revised the outlook on Press Metal Aluminium Holdings Bhd’s and Press Metal (Labuan) Ltd’s ratings to negative from stable.

In a statement yesterday, the rating agency said the negative rating outlook is reflective of its expectation of weaker credit metrics over the next 12-18 months as Press Metal pursues growth and increasing raw material security through debt-funded acquisitions and capacity expansion in a weak aluminium price environment.

Press Metal announced the expansion of its smelting capacity in Bintulu, Sarawak (Phase 3) by 320,000 tonnes on the back of a new 15-year power purchase agreement with Sarawak Energy Bhd, for an additional 500mw.

Moody’s expects Press Metal’s adjusted leverage to rise to around 3.5 times next year, before improving to 3.2 to 3.3 times in 2021 when the expanded capacity comes onstream and the benefits of the company’s investments are realised.

“In terms of environmental, social and governance factors, the ratings reflect the elevated environmental risk facing aluminium producers in terms of carbon regulation and air pollution,” it added.

Nevertheless, Moody’s pointed out that Press Metal uses hydropower, which is a more environmentally-friendly source of energy. The company also procures carbon anodes with less than 2% sulphur content to regulate sulphur oxide emissions.

Given the negative outlook, upward pressure on the rating is unlikely, said Moody’s.

It added that it could change the outlook to stable if Press Metal successfully completes its acquisitions and expansion in a timely manner, resulting in lower costs and higher margins.

“Specifically, Moody’s would revert to a stable outlook if the company’s: (1) earnings before interest, taxes, depreciation and amortisation (Ebitda) margin remains above 15% on a sustained basis; and (2) adjusted debt/Ebitda remains below 3.5 times for an extended period.”

Meanwhile, Moody’s affirmed Press Metal’s corporate family rating of Ba3. It also affirmed the backed senior unsecured rating of Ba3 for Press Metal (Labuan).

The agency said the rating could be downgraded if there is a material erosion in its profitability, driven by extended operational shutdowns, an increase in power costs, delays in the execution of planned investments or extended tightening in alumina-to-aluminium pricing.

“It could also be downgraded if the company’s leverage increases or its liquidity deteriorates. Specifically, Moody’s would downgrade the rating if the company’s: (1) Ebitda margin remains below 15% for an extended period; and (2) adjusted debt/Ebitda rises above 3.5 times.”

Press Metal’s ownership is concentrated in the promoter group led by the Koon family, which held a 60% stake as of June 30. This risk is partially mitigated by Sumitomo Corp’s ownership of 20% of the Press Metal’s subsidiaries, Press Metal Bintulu Sdn Bhd and Press Metal Sarawak Sdn Bhd, which run the smelters.