Perwaja Steel Sdn Bhd Strategic Management

1 Introduction

In this report, Perwaja Steel Sdn Bhd, which it seems to be in financial difficulty and could face insolvency if not addressed appropriately, will be analysied through the article by The Star paper dated 13 July 2013 and the company’s 2012 annual report. The report will go through company profile and will take an in depth discussion on the existing issues from the treasurey management perspective supporting by the facts and figures. The report will also provide an appropriate recommendation that could be adopted by the firm in order to solve the company’s financial problems.

2 The comapny profile of Perwaja Steel Sdn Bhd.

Perwaja Steel Sdn Berhad, a company under Perwaja Holdings Berhad is the Malaysia’s largest steel producer. It was established in 1982 and was listed on the main board of Bursa Malaysia in August 2008. They have been in steel business for more than 32 years and had two major plants in Terengganu and Kedah. They are among Malaysia’s largest producer of primary steel products that are supplied directly to downstream producers both locally and globally.

The board of directors consists of twleve members. Tan Sri Abu Sahid bin Mahamed as the executive Chairman and Tan Sri Dato’ Pheng Yin Huah as Manaing Director are two key persons of this board. On July 2013, an article got published reagrding the loss making of Perwaja company. It has been reported that the company’s bond were downgraded due to Perjawa’s liquidity position and they would have difficulties to meet their upcoming financial obligations.

3 Identification of the financial and creditors problem in the company

According to report by The Star, there are several factors which made Perwaja far behind of what they desire. Steel dumping, high gas price and iron ore prices are significant factors behind Perwaja’s financial failure. The firm expecting to face insolvency if the issues about would not be solved. The high cost of raw material that is keep increasing and other financial problems made Perwaja unable to repay back their debts, So it leds to a downgrade in their bond value.

4 Discussion of the existing issues from the treasury management perspective

Defining the process of treasurey managemnt is about handling liquidity to make sure that the perfect amount of cash resources is available in the right place, in the right currency and at the right time in such a way as to minimize cost, maximise return and control the associated risk at an acceptable level. It is crucial for Perwaja to study and analyse their past trends to find out and try to improve their lack of treasury management. The discussion would center around such issues that led to the problem including liquidity risk, cash risk, management of cost, returns and revenues, intrest rate risk, refianncing risk and forex risk. It is good to mention that issues are not limited to the above only.

4.1 Liquidity Management and risk :

Liquidity risk is reffering to having insufficeint fund available to meet financial obligation. The most important issue delaing with Perwaja crisi is liquidity management and this was one of the main reasons that their bond got downgraded. Falling price of steel and high cost of production, which both decreased Perwaja’s cashflow significantly, were two measures that affected Perwaja’s liquidity position. By calculating the current ration from Perwaja’s annual report, the ability to meet short term obligations can be identified:

Current ratio for the year of 2013= 202.9/1823.1=0.05644

Current ratio for the year of 2012= 1188.6/2022.7=0.5876

Current ratio for the year 2011= 771.1/1453.1=0.5306

Looking the the current ration which is even less than 1, the company is surely unable to meet its short term obligation and will face liquidity problems soon. The acceptable benchmark is between 1.5 to 2 which demonstratses that totall cuurent asset are more than current liabilities. Perwaja fails to handle a good liquidty management because they do not have the right amount of cash resources t in the right time. Another ratios that are helpful to analyze liquidity are acid test (quick ratio ), inventory turnover ratio.

Quick ratio for the year of 2013= 40.6/1823.1=0.022

Quick ratio for the year of 2012= 204.2/2022.7=0.1009

Quick ratio for the year 2011= 156.4/1453.1=0.1076

Inventory turnover ratio for the year 2013= 1085/162.3=6.68

Inventory turnover ratio for the year 2012= 1823.3/984.4=1.85

Inventory turnover ratio for the year 2011= 1710.6/614.7=2.78

Quick ratio is an indicator of a company’s short-term liquidity and measures a company’s ability to meet its short-term obligations with its most liquid assets. As the ratios shown, Perwaja is highly not liquid and probably fails to meet its obligation (Low quick ratio). Moreover, inventory turnover ratio showing how many times a company's inventory is sold and replaced over a period.A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. Inventory manageemnt in Perwaja is highly inefficient.

4.2 Cash resources management, cash risk

Cash resource management mainly focuses on cashflows of the comapny. In this case, decreasing steel prices have caused decreased revenue for Perwaja, causing their cash flow to be reduced. In addition, the international prices of raw materials such as iron ore, coking coal and scrap metal have been increasing. Moreover, high price for their gas at RM18.35 per million metric British thermal unit made Perwaja pays the highest gas price in Malaysia. Compared with independent power producers and other steel manufacturers in the country, the price that Perwaja pays is higher. Within the past 6 years, Petronas’ gas prices have increased over 40% for the company (Adnan et al., 2013). This would lead to an increase in production cost due to the need of iron ores in order to produce steel and higher cost will then reduce the cash flow of Perwaja.Another issue is steel dumping which has also affect Perwaja as the products from the Chinese and Indonesian companies

...