New lease of life for Perwaja?

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HEAVILY indebted Perwaja Holdings Bhd has seen its share price surge 310% year to date. From an all-time low of 5 sen and market capitalisation of a mere RM28 million at the beginning of the year, it closed last Friday at 20.5 sen, with a market capitalisation of RM128.8 million.

The rally came before last Friday’s signing of a collaboration agreement with Zhiyuan Investment Group Co Ltd, which will invest RM300 million to equip and upgrade Perwaja’s Kemaman plant in Terengganu to make stainless steel.

perwaja-corp_20_1066However, it is still too early to say if the Chinese firm has cemented its commitment in Perwaja (fundamental: 0; valuation: 0). This is because the initial RM300 million plan, covering an 18-month period, will only involve the Chinese party leasing and equipping the Kemaman plant.

Pending regulatory approval of Perwaja’s restructuring scheme to deal with its RM2.2 billion debt liabilities, it is learnt that subscription of equity by the Chinese firm will only come after one year, possibly via “injecting” its machinery installed and related upgrading works at the Kemaman plant, into Perwaja. But details remain sketchy at this juncture.

According to information given at the signing, Zhiyuan’s initial RM300 million investment will be divided into two phases. Under the first phase, the Chinese firm will invest RM100 million, of which RM30 million will be a security deposit for the leasing of the Kemaman plant from Perwaja, and the balance being the value of new machinery that it will bring into the plant. For the second phase, Zhiyuan will invest RM200 million to further equip or upgrade the plant, with the aim of producing 400,000 tonnes of semi-finished stainless steel slabs every year.

Further investments by Zhiyuan will only be revealed 18 months down the road under the third phase of Perwaja’s five-year revival plan that will see it producing 800,000 tonnes of alloy steel per year.

When asked about the immediate plans, Perwaja’s director Tan Sri Pheng Yin Huah says if everything goes smoothly, a formal agreement will be signed between Perwaja and Zhiyuan within three months and the production line in Kemaman plant will be reactivated in six months.

Pheng’s listed vehicle Kinsteel Bhd currently owns 31.25% of Perwaja.

“I believe Perwaja’s collaboration with Zhiyuan at this juncture is timely as demand for stainless steel has been stable, while we can avoid stiff competition in the traditional market due to duplication of products,” Pheng told reporters after the collaboration ceremony last Friday.

While he offered no details, the Kuantan-based businessman says  Zhiyuan is expected to emerge as a substantial shareholder of Perwaja. “Even though Kinsteel’s shareholding in Perwaja will be reduced post-restructuring, we will remain a major team member.”

Perwaja director Datuk Alan Ong says the entry of Zhiyuan will inevitably see a dilution of the present substantial shareholders’ stakes in the steelmaker. “Importantly, Kinsteel’s stake in Perwaja will be reduced. But Kinsteel will stay on as a significant shareholder in Perwaja,” he stresses.

Another substantial shareholder of Perwaja is Tan Sri Abu Sahid’s Maju Holdings.

Ong says it is premature to talk about how Perwaja would facilitate the entry of Zhiyuan as a shareholder or the size of the latter’s stake.

It is worth noting that at the group level, Perwaja has accumulated losses of RM1.89 billion, as well as total debt liabilities of RM2.22 billion owed to banks, statutory bodies as well as energy suppliers Tenaga Nasional Bhd and Petroliam Nasional Bhd (Petronas).

Perwaja’s Kemaman plant was forced to close in August 2013 after its energy supply was cut as the company had repeatedly missed payments to Tenaga and Petronas.

Of the RM2.22 billion debt, Ong says Perwaja owes RM450 million to Tenaga and Petronas, RM200 million to the Ministry of Finance and the balance to banks and other creditors. The proposed corporate and debt restructuring scheme is subject to the approval of Perwaja’s creditors and regulatory authorities.

“We hope that the creditors are in favour of what we are doing. {To restart Kemaman plant}, we need the banks’ consent because the land is currently charged to them. If they say no (to Zhiyuan), we can’t even start,” says Ong.

He, declines to comment on whether the creditors will have to take a haircut.

On leasing the Kemaman plant to Zhiyuan, Ong explains that at the initial stages, the Chinese firm will import machinery from China to facilitate the quick start-up of operations for the manufacturing of intermediate alloy steel-related products.

“These operations will later dovetail into the manufacturing operations of Kemaman plant, which will be modified for the eventual production of stainless steel products,” he says.

In conjunction with that — if market regulators approve the restructuring scheme — Perwaja will carry out a fundraising exercise and use the proceeds to purchase the new machinery brought in by Zhiyuan as well as refund the safe deposit to the latter.

Should Zhiyuan also participate in the fundraising exercise, the scheme could be seen as the Chinese firm injecting its machinery into Perwaja in return for a substantial stake.

News of Zhiyuan coming in has lifted sentiment on Perwaja’s stock. However, market observers warn of the potentially huge dilution to existing shareholders, noting that Zhiyuan’s initial RM300 million investment alone is 2.3 times Perwaja’s current market capitalisation of RM130 million.

There is also the risk that if things do not work out, Zhiyuan may relocate its machinery back to China.

Nevertheless, for now, Zhiyuan’s entry is crucial to restart the Kemaman plant and rehire some of the workers who have been out of work for almost two years.

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Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on May 11 - 17, 2015.