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RAM Ratings reaffirms Hubline's ratings, maintains negative outlook

RAM Ratings has reaffirmed the respective long- and short-term ratings of A2 and P1 for Hubline Berhad's ("Hubline" or "the Group") RM150 million Murabahah Commercial Papers/Medium-Term Notes Programme (2005/2012). Concurrently, the A2 rating of its RM70 million Bai' Bithaman Ajil Islamic Bonds (2005/2012) has also been reaffirmed. Meanwhile, the negative outlook on the long-term ratings has been maintained. Hubline is involved in the provision of container and dry-bulk shipping services as well as vessel chartering.

Hubline's ratings remain supported by the Group's extensive network of 70 agents across 18 countries and niche routes that give it a competitive edge over its peers. The Group plies certain niche routes which are less competitive and where freight rates are more attractive. Due to its fleet of smaller vessels, the Group is able to call at smaller ports that cannot accommodate the large vessels of the main line operators. Being involved in both the container and dry-bulk shipping segments, Hubline is able to enjoy some degree of diversification.

However, the ratings are moderated by the Group's vulnerability to the cyclical nature of the shipping industry. Hubline has no control over movements in freight rates, which can be very volatile. On top of this, the shipping industry is also facing overcapacity amid the slowdown in global trade; this is anticipated to worsen with the imminent availability of more new vessels. Meanwhile, Hubline is also exposed to volatile bunker costs as well as hefty expenses from the maintenance and purchase of vessel equipment to support its operations.

In FYE 30 September 2011 ("FY Sep 2011"), profit from Hubline's dry-bulk shipping business improved year-on-year ("y-o-y") following some recovery in freight rates and cargo volumes from new contracts. Although the rates for container shipping declined y-o-y in FY Sep 2011, the Group benefited from lower bunker costs (arising from the stronger ringgit against the US dollar) as well as lower operating expenses from its active planning of trade routes. As such, Hubline's operating profit before depreciation, interest and tax jumped 69.4% y-o-y to RM85.08 million in FY Sep 2011 (FY Sep 2010: RM50.21 million). At the same time, the Group's funds from operations ("FFO") debt cover advanced from 0.14 to 0.16 times y-o-y. That said, its cashflow-protection metrics remained weaker than its pre-crisis level of above 0.2 times.

Despite the better showing, we have maintained the negative rating outlook, premised on Hubline's patchy recovery in FY Sep 2011 and our concerns over the sustainability of its improved operating performance. "Going forward, the operating environment for Hubline's container and dry-bulk shipping is expected to remain tough amid the influx of new capacity and mounting anxiety over the Euro zone's crises, which may pose downside risks to global trade. We also expect the Group to remain challenged by weak freight rates for both its shipping segments. Taking this into consideration, Hubline's FFO debt cover is envisaged to remain lethargic at around 0.14 times through the next 2 years," opines Kevin Lim, RAM Ratings' Head of Consumer and Industrial Ratings.

Hubline's ratings could be downgraded if its business fundamentals weaken and its financial metrics deteriorate amid a notable decline in freight rates and/or cargo volumes. On the other hand, the negative outlook may be revised to stable if the Group is able to demonstrate sustainable improvement in its financial performance.

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Media contact
Jannie Wong
(603) 7628 1084
jannie@ram.com.my

© Press Release 2012