Revises outlook to negative .
MARC has affirmed its AA-IS rating on Malaysia Marine and Heavy Engineering Holdings Berhad's (MHB) RM1.0 billion Sukuk Murabahah Programme. The rating outlook is revised to negative from stable.
The outlook revision to negative mainly reflects MHB's small outstanding order book and the increasing challenges the company faces over the intermediate term to improve its order book replenishment given the protracted slowdown in the oil and gas industry. The affirmed rating incorporates a one-notch rating uplift from MHB's standalone rating, taking into consideration its status as a member of the PETRONAS group which remains the company's main source of contracts. The support assessment also considers the business linkages between the entities within the group. PETRONAS has a 62.4% equity interest in MISC Berhad which in turn has a 66.5% interest in the company. MHB's standalone rating factors are its leading domestic position as an offshore and marine services provider, its strong capital structure and financial flexibility.
As at end-September 2015, MHB's order book stood at RM1.0 billion, down from RM1.6 billion as at end-2014. While MHB has the largest domestic yard in terms of size and capacity with the ability to construct deep water structures, it has to contend with keen competition from international yard operators for new contracts. Nonetheless, MHB will probably be awarded some contracts from its tender book of over RM9.0 billion although these are likely to be small and provide earnings visibility only for the near term. In December 2015, the company secured five new contracts worth RM527.0 million from PETRONAS Carigali Sdn Bhd, which are mainly related to the RAPID project.
For 9M2015, MHB's operating profit declined by 9.4% y-o-y to RM73.2 million on the back of lower contribution from its offshore business unit (OBU). The unit also made additional provisions of RM17.2 million mainly for cost overruns on the Malikai TLP, a major project which is reaching its tail-end. The weaker performance of the OBU was offset by higher operating profit from the marine repair business unit (MBU) segment which benefitted from improved repair business from external parties. MARC notes that the group's cost optimisation programme, which include a mandatory separation scheme in 2014, has contributed to lower operating costs in 9M2015.
Cash flow from operations increased to RM535.7 million (9M2014: RM279.6 million) due to the completion of major contracts and lower working capital requirements following fewer contract works. Free cash flow was higher at RM437.1 million (9M2014: RM80.9 million) in the absence of dividend payout during the period and lower capex of RM98.6 million (9M2014: RM118.7 million). Going forward, cash flow generation is expected to be pressured by lower contract works as well as capex on yard optimisation. MHB has a planned capex of RM98.8 million which is expected to be financed by internal funds. This notwithstanding, MARC notes that MHB retains strong financial flexibility as reflected in its cash balances of RM768.2 million at end-September 2015 (2014: RM589.2 million) and zero debt level.
MARC foresees the prospects for MHB to remain challenging under the present low oil price environment. The rating would be downgraded if MHB's performance continues to weaken such that its credit profile is no longer commensurate with its current standalone rating. Conversely, the negative rating outlook would be revised to stable if MHB is able to sustain a meaningful order book replenishment that would reverse its declining revenue and earnings trend.
The full Credit Analysis Report will be made available on MARC's website at www.marc.com.my.
Contacts: Afeeq Amiri +603-2082 2256/ afeeqamiri@marc.com.my, Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my
© Press Release 2016
