12 February 2015
RAM Ratings has revised the outlook on the long-term ratings of Mudajaya Corporation Berhad's (Mudajaya Corp) Islamic Debt Programmes. At the same time, RAM Ratings has reaffirmed the AA3/P1 ratings of Mudajaya Corp's Islamic Debt Programmes. The ratings reflect the credit profile of its parent, Mudajaya Group Berhad (Mudajaya or the Group).

The revision of the rating outlook to negative is premised on Mudajaya's poor performance and reduced earnings visibility as a result of a shrinking order book. The Group's 9M FY Dec 2014 earnings and resultant weaker funds from operations (FFO) debt coverage of 0.15 times are significantly below our expectations. This follows substantial additional works under some of its major contracts due to unforeseen circumstances. Although Mudajaya is confident of claiming costs for these works at a later stage, the amount is subject to lengthy negotiations. We believe the additional works continued into 4Q FY Dec 2014 and may drag on the financials. Over the next 2 years, Mudajaya's FFO debt coverage could recover to about 0.20 times, provided that it secures new contracts to replenish its diminishing order book. We note that awards for some new contracts it has tendered for, largely in the infrastructure and power sectors, are often subject to delays.

Meanwhile, Mudajaya's ratings continue to be supported by its position as a leading local contractor with a niche expertise and requisite experience in power station civil works. This sub-segment of the industry relies heavily on a proven track record, and is consequently dominated by a handful of local contractors. Additionally, the Group has the expertise to take on technically challenging construction projects.

Mudajaya possesses a strong balance sheet despite the steep hike in its debt level to RM414.57 million as at end-September 2014 (end-December 2013: RM27.55 million). Its gearing and net gearing ratios came in at a respective 0.35 and 0.19 times. We expect the Group's debt to exceed RM500 million over the next 2 years. As Mudajaya maintains high cash levels, its net gearing ratio is envisaged to stay robust at less than 0.20 times. The Group's large cash reserves also alleviate liquidity concerns.

As with other construction players, Mudajaya is exposed to the sector's cyclicality and significant execution risks. In spite of being a seasoned contractor, Mudajaya has incurred significant additional costs in some of its major contracts. Further, the Group's order book is fairly lumpy, which renders its profits vulnerable to fluctuations in project earnings or losses. Given its appetite for large contracts, concentration risk is likely to remain. In addition, due to its focus on infrastructure-related projects, Mudajaya is exposed to the risk of changes in government fiscal policies.

Elsewhere, Mudajaya's non-core investments that are aimed at providing recurring income come with risks that may be unfamiliar to the Group. Further debt-funded acquisitions could weaken its financial profile.

Mudajaya's long-term rating may be downgraded if the Group registers sustained FFO debt-coverage levels that are weaker than 0.2 times or gearing ratios of above 0.6 times. This could result from a significant increase in borrowings, continued weak earnings due to failure in replenishing its order book or unexpected large investments. Conversely, the negative rating outlook may be reverted to stable if the Group is able to demonstrate sustainable FFO debt-coverage levels of above 0.2 times.

Mudajaya Corp's Islamic Debt Programmes consists of its Islamic Medium-Term Notes Programme (2014/2029) and Islamic Commercial Papers Programme (2014/2021) with a combined limit of RM1.0 billion. Mudajaya is an investment-holding company listed on the Main Market of Bursa Malaysia with its entire operations conducted through Mudajaya Corp and its subsidiaries.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my

© Press Release 2015