Mar 19, 2013 -
MARC has downgraded its ratings
on Alam Maritim Resources Berhad's (Alam Maritim) RM500 million Sukuk Ijarah
Medium Term Notes (Sukuk Ijarah MTN) and RM100 million Murabahah Commercial
Papers/Murabahah Medium Term Notes (MCP/MMTN) programmes to A+IS and MARC-2ID
/A+ID from AA-IS and MARC-1ID /AA-ID respectively, and revised the outlook of
both ratings to stable from negative. The rating action affects RM365 million
of outstanding notes issued under the rated programmes.
The downgrade of Alam Maritim’s
ratings reflects our view that the marine offshore service provider will have
difficulty generating the required level of operating earnings and cash flow to
restore its debt protection credit metrics to levels commensurate with ‘AA-’
and ‘MARC-1’ ratings. The current rating action reflects MARC’s expectation
that Alam Maritim’s credit protection measures will remain under pressure for
an extended period of time and weaker than the rating agency’s thresholds for
the maintenance of the rating based on its unaudited results for the financial
year-end December 2012. While Alam Maritim’s order book provides adequate
near-term earnings visibility and its debt burden has reduced, MARC foresees
that Alam Maritim’s key credit metrics will remain weaker than previously
expected over the near to intermediate term. The change in rating outlook to
stable from negative reflects MARC’s view that Alam Maritim is better
positioned at the lower ratings.
The downgrade of Alam Maritim’s
short-term rating incorporates the company’s tightening liquidity in view of
its significant forthcoming debt maturities, and the decline in its
consolidated cash balance since MARC’s last rating action in March 2012, partly
offset by its reduced debt burden.
While Alam Maritim’s overall
financial performance has improved since 2011, following pre-tax losses in
2010, the group’s earnings momentum in 2012 was mostly fuelled by a steep rise
in its share of results of jointly controlled entities to RM40.6 million from
RM2.2 million the previous year. This helped lift the group’s unaudited pre-tax
profits to RM57.1 million (2011: RM15.5 million). Of particular concern to MARC
is the decline in Alam Maritim’s operating profit or profit before finance
costs and share of results of associates and jointly controlled entities to
RM20.8 million in 2012 compared to RM26.0 million the year before. Alam Maritim’s
operating profit margin remained thin at 4.1% in 2012 compared to pre-2010
levels of more than 30%. For 4Q2012, Alam Maritim posted an operating loss of
RM3.3 million. Further, Alam Maritim’s finance costs remain high relative to
its operating earnings despite falling by nearly RM10 million in 2012 compared
to 2011 as a result of its decreased debt levels.
The ratings also acknowledge
Alam Maritim’s established and leading position in the domestic offshore
support vessel (OSV) market. The OSV charter business contributed 78% of the
group’s consolidated profits during 2012. The group’s fleet currently consists
of 43 OSV vessels, including vessels held under associates and JVs. The vessels
comprise mostly anchor-handling tug supply (AHTS), utility and supply vessels
and barges. Stronger demand for OSVs increased Alam Maritim’s average vessel
utilisation rate to 80% in 2012 from the 70% achieved in 2011. As of November
2012, the group has a total order book of about RM800 million, including those
under the JVs and associates (about 65% of the order book is under the JVs and
associates). While the order book is expected to provide earnings visibility
for approximately two years, MARC is mindful of Alam Maritim’s continued
sensitivity to sustainable recovery in the OSV market and the OSV business
segment’s low return on assets. Earnings of its OSV business are sensitive to
vessel utilisation levels given the level of fixed costs.
Alam Maritim’s other core
business segment, Subsea Services and OIC (offshore, installation and
construction), posted an operating loss of RM6.9 million before finance costs
and share of results of jointly controlled entities on a revenue of RM289.4
million in 2012. However, overall profitability of the segment held up owing to
Alam Maritim’s share of profits of jointly controlled entities which came in at
RM19.7 million. The Subsea Services and OIC segment posted pre-tax profits of
RM11.8 million for 2012, almost thrice its 2011 results, boosted by
contributions from two OIC contracts.
The group’s cash flow from
operations (CFO) rose to RM68.1 million in 2012 (2011: RM23.2 million);
however, its cash and cash equivalents continued its declining trend to RM92.7
million in 2012 from RM128.6 million as at end-2011 mainly due to the repayment
of borrowings. The group’s DE improved to 1.06x as at end-2012 from 1.25x at
end-2011. While Alam Maritim has made good progress in paring down its
on-balance sheet debt, MARC notes the prospect of rising off-balance sheet debt
in 2013. New capital expenditure for vessel acquisitions has been made via
off-balance sheet financing through associates and JVs. Adjusting for Alam
Maritim’s share of borrowings under the associates and JV, MARC estimates the
group’s adjusted DE to be around 1.8x as at end-September 2012. The rating
agency believes that this measure of debt leverage will be weaken further as
the group takes delivery of two new vessels in 1Q2013 (the group took delivery
of one vessel in February 2013 and another vessel is expected to be delivered
by end-March 2013), which will also be financed under its JVs.
MARC expects Alam Maritim’s
liquidity to tighten further in 2013 as it will have to address RM145 million
of debt maturities during the year (of which RM50 million was repaid in January
2013). Alam Maritim’s cash and cash equivalents have been declining since 2009
and stood at RM92.7 million as at end-2012. The rating agency also notes that
the group has some flexibility to roll over its outstanding RM55 million MCP
and push maturities further into the future as the programme expires only in
July 2014. Alam Maritim has been generating meaningful amounts of free cash
flow (2012: RM39.9 million; 2011: RM23.2 million) in recent periods and MARC
expects the group to use its free cash flow to reduce debt over the next
several years.
Current ratings assume continued
improvement in the group’s operating performance and prudent measures on the
part of management to address Alam Maritim’s forthcoming debt maturities and
improve its credit protection measures.
Contact:
Sharidan Salleh, +603-2082 2254/
sharidan@marc.com.my
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