AFTER many years in the doldrums, could there be light at the end of the tunnel for ailing steelmaker Perwaja Holdings Bhd?

Sources familiar with the company say the recently announced deal with Chinese party Zhiyuan Investment Group Co Ltd could have its merits.

Perwaja (fundamental: 0.0, valuation: 0.0) announced last week that it had entered into a memorandum of agreement “to explore the possibility of Zhiyuan’s participation in Perwaja and/or via other business cooperation model to revive Perwaja”.

Despite the positive news, many advise caution, and say that they will only believe that Zhiyuan will come in after the deal is inked.

“Anything can happen until then. Only when they — Perwaja and Zhiyuan — both sign on the dotted line will I consider it a done deal,” says a market watcher.

Zhiyuan’s plan involves utilising Perwaja’s plant in Kemaman to make specialised steel products for the China market, The Edge has learnt. This, it seems, can be done with minimal cost by the Chinese company.

Perwaja’s announcement to the stock exchange indicates that Zhiyuan’s core business includes alloy manufacturing, which backs up the specialised steel story.

According to industry sources, Perwaja’s plant already has a good asset base that includes two electric arc furnaces, which can be switched off when idle, and thus save costs. Blast furnaces, on the other hand, need to be in continuous operation.

“This could be the right fit for Perwaja. There is a lot of demand for specialised steel these days in China, but in Malaysia, there is very little demand,” the source adds.

However, Perwaja isn’t the only steel miller that is trying to look for a Chinese partner. The Lion Group’s Megasteel Sdn Bhd has also been looking for a foreign investor for some time. However, Lion Group major shareholder Tan Sri William Cheng had been quoted as saying that the structure of the local steel industry posed hurdles to the entry of foreign players. He is of the view that the lack of protection for local millers has made the industry unattractive for foreign investors.

It is noteworthy that the Chinese party will most likely end up controlling Perwaja after it injects funds into the company and helps revive it.

Currently, the largest shareholder of Perwaja is Tan Sri Abu Sahid Mohamad who has 63.1% direct and indirect interest in the company. Kinsteel Bhd (fundamental: 0.0, valuation: 1.2), in which Abu Sahid has a 15.8% stake through his flagship Maju Holdings Sdn Bhd, holds a 31.2% stake in Perwaja. Tan Sri Pheng Yin Huah, via his vehicle Kinsteel, has an effective 32.4% equity interest in Perwaja.

Pheng acquired a 51% stake in Perwaja in 2006 through Kinsteel at the peak of the steel cycle, and enjoyed a profitable run, buoyed by high steel prices, up until 2008.

Sources say back then, Abu Sahid was deciding between Pheng, Tan Sri William Cheng’s Megasteel Sdn Bhd, and Tan Sri Quek Leng Chan of the Hong Leong group.

Abu Sahid chose Pheng for various reasons, but principally because he saw that Pheng’s children were involved in the business, which augurs well for succession planning.

However, soon after the global financial crisis, Perwaja faltered and its plant had to be shuttered after oil company Petroliam Nasional Bhd and utility giant Tenaga Nasional Bhd halted gas and electricity supplies, and Perwaja was no longer able to pay its energy bills.

  As one shareholder puts it, “Our shares are worth nothing without the Chinese party’s intervention. All the former glory is lost.”

Perwaja’s stock closed at 10 sen last Friday, giving it a market capitalisation of RM56 million.

Since November 2013, Perwaja has been a Practice Note 17 company, a category for cash-strapped companies.

For its first three months ended September last year, Perwaja suffered a net loss of RM44.9 million on RM1.8 million in sales. For the year ended June 2014, net losses amounted to RM1.2 billion.

As at end-September last year, Perwaja had cash and bank balances of RM7. 5 million, while overdrafts and short-term borrowings totalled RM1.1 billion and long-term debt commitments came to RM276.4 million.

The company’s finance costs for the three months ended September was a whopping RM18.9 million. 

According to the sources, part of the restructuring at Perwaja involves banks taking a haircut as well.

The proposed restructuring scheme entails secured creditors taking a 20% haircut on RM850 million worth of debts, and unsecured creditors taking a 50% haircut. The secured creditors include RHB Bank Bhd, OCBC Bank and Kuwait Finance House.

Perwaja’s unsecured lenders include Petronas, which until end-2014, was owed more than RM275 million, while Tenaga was owed more than RM175 million in electricity bills. The Malaysian government has extended some RM200 million in soft loans, and other unsecured suppliers are owed about RM250 million.

The creditors are basically caught between a rock and a hard place, as the only alternative to the proposal is the liquidation of assets, which would not fetch much, considering the specialised nature of the business.

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 February 16 - 22, 2015.

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