This article first appeared in The Edge Malaysia Weekly on October 15, 2018 - October 21, 2018

NS Bluescope Malaysia Sdn Bhd has emerged as the front runner to acquire YKGI Holdings Bhd’s manufacturing plant in Klang, Selangor, industry sources say.

In March, The Edge reported that two players, NS Bluescope Malaysia and CSC Steel Holdings Bhd, were eyeing YKGI’s manufacturing plant in Klang, and the company, when queried by Bursa Malaysia, had said that it had entered into mutual confidentiality agreements with the two parties to dispose of certain assets.

“[However] to date, the company (YKGI) has not received any offer from the interested parties,” YKGI had said back then.

According to sources, NS Bluescope Malaysia is the lone party looking to acquire the plant now, largely because of the current challenging climate.

Officials of NS Bluescope Malaysia and YKGI could not be contacted for comment. However, even if they were contactable, it is unlikely that they would comment, considering the non-disclosure agreements.

“Things are difficult for steel players.  There is no certainty. Imports are still flooding in, so our future seems quite bleak unless and until the government steps in … but the government is currently busy grappling with bigger issues, so we are not a priority,” says an official at a flat steel company.

In a nutshell, NS Bluescope Malaysia could be looking to squeeze YKGI for a good deal as the company is not in a good bargaining position. As at end-June, YKGI had RM222.52 million in assets held for sale in its financial results. In its annual report, YKGI states that it has a 10.04ha freehold parcel in Klang with buildings — acquired in July 2002 and revalued in December 2017 — pegged at a net book value of RM79.23 million.

Previous annual reports have it that the Klang land houses a manufacturing plant that processes hot rolled coils into hot rolled pickled and oiled coils, cold rolled coils, galvanised coils and colour-coated coils, among others. In total, the Klang facility can produce about 700,000 tonnes of various products derived from hot rolled coils per year.

Other than the parcel in Klang, YKGI has a 3.4ha parcel with a 60-year lease expiring in January 2052 in Kuching, Sarawak, with a net book value of RM9.05 million and a 0.85ha parcel in Kota Kinabalu, Sabah, with a net book value of RM8.50 million.

YKGI also says in its annual report that during FY2017, various unfavourable operating factors impacted the performance of its manufacturing at the Klang factory, resulting in lower margins than FY2016.

These included the appreciation of the US dollar against the ringgit, which increased raw material costs and put a lot of pressure on gross margins; the volatility and increasing price trend of hot rolled coils; and cheaper imported materials from Asean countries, which resulted in an influx of materials into the local steel market that was already experiencing oversupply conditions.

For its six months ended June 30, YKGI suffered a net loss of RM3.71 million from RM163.38 million in sales. The company had negative reserves amounting to RM2.22 million.

As at end-June, YKGI had cash and cash equivalents of RM24.24 million and, on the other side of the balance sheet, it had short-term borrowings of RM127.82 million and long-term debt of RM17.6 million.

If this sale goes through, it will be the second large-scale sale of assets in as many years. At end-August 2016, YKGI sold a 9.14-acre parcel with a single-storey detached factory, a double-storey production office,  a five-storey integral office building, a guard house, a refuse chamber and a pump house to TG Medical Sdn Bhd for RM51.5 million, and used the proceeds for payment to suppliers, the purchase of raw materials, spare parts and consumables, and to defray operating expenses.

The recent changes in the operating environment have rendered the global and domestic steel industry extremely challenging. The turmoil in the local flat steel industry heightened in March when the US imposed a 25% tariff on steel imports and the European Union introduced a 25% tariff into the continent. The imposition of these tariffs resulted in steel being diverted or dumped in Malaysia.

NS Bluescope Malaysia is wholly owned by NS Bluescope Lysaght Singapore Pte Ltd. According to RAM Credit Rating, NS Bluescope Malaysia registered an after-tax profit of RM70.42 million on turnover of RM740.99 million for its year ended June 2017,  which could indicate that its business here is doing well.

YKGI is 26.75% controlled by Marubeni-Itochu Steel Inc and 15.32% by Yung Kong Co Bhd, the vehicle of the Hii family, while Datuk Soh Thian Lai, who is the company’s executive deputy chairman, has 6.88% equity interest.

YKGI ended trading last Thursday at 19 sen, giving the company a market capitalisation of RM66.63 million.

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