RAM assigns AAA/Stable/P1 ratings to UMW’s RM300 million Islamic CP Programme

Published on 28 August 2013

RAM Ratings has assigned AAA/Stable/P1 ratings to UMW Holdings Berhad’s (“UMW” or “the Group”) RM300 million Islamic Commercial Papers/Medium-Term Notes Programme (2010/2027). Concurrently, RAM has reaffirmed the AAA/Stable rating of the Group’s RM2 billion Islamic Medium-Term Notes Programme (2013/2028). UMW is involved in the assembly and distribution of Toyota vehicles, trading of heavy and industrial equipment (e.g. Komatsu, Toyota, Case and Bomag), provision of oil and gas (“O&G”) services (with drilling and oil-field services as core offerings), manufacture of automotive parts, and distribution of lubricants (Pennzoil and Repsol).

The rating predominantly reflects UMW’s strong market position and solid financial profile. Through 51%-owned UMW Toyota Motor Sdn Bhd, the Group distributes the Toyota marque that leads the non-national segment of the Malaysian automotive industry. Toyota accounted for 16.8% of the total industry volume as at end-2012; its best-selling models are the Vios, Camry, Hilux and Hiace – the most popular in their respective segments. The Group’s associate, Perusahaan Otomobil Kedua Sdn Bhd (or Perodua), commands the lion’s share of A segment mini cars through the Viva.

The UMW Group is also a market leader in the domestic heavy- and industrial-equipment segments via best sellers Komatsu and Toyota, respectively. In the O&G sector, UMW and its local peers benefit from the policies of the Malaysian Government and oil giant Petroliam Nasional Berhad (“PETRONAS”), which are designed to promote and develop domestic O&G players. Given UMW’s ownership of jack-up drilling rigs that are typically used at relatively shallow depths, the Group is poised to benefit from the development of marginal oil fields.

UMW enjoys a robust financial profile. Despite an increasing debt load from the expansion of its O&G division, its adjusted gearing ratio has not exceeded 0.52 times in the last 5 years, supported by its strong retained earnings. Backed by healthy cash reserves, the Group’s net gearing ratio has been negligible. UMW also boasts a sturdy cashflow, generating more than RM1 billion of funds from operations (“FFO”) annually; this translates into an average adjusted FFO debt cover of at least 0.45 times over the same 5-year period – save for fiscal 2009, when its profit performance waned amid the global financial crisis.

UMW’s financial metrics remained healthy in 1Q FY Dec 2013. The Group’s gearing ratio came up to 0.48 times (end-December 2012: 0.46 times) following a slight increase in borrowings, the bulk of which was for the final payment of Naga 4 (one of its offshore rigs). However, UMW’s net gearing ratio remained manageable at 0.13 times. The Group’s heftier debt load resulted in a lower FFO debt cover of 0.45 times as at end-March 2013 (end-December 2012: 0.58 times).

Going forward, UMW’s capital expenditure (“capex”) is estimated to come up to about RM4 billion over the next 3 years. Of this, RM2.6 billion has been earmarked for the expansion of its O&G division. “While the capex of its other divisions is envisaged to be covered by internal cash, that of the O&G segment will rely on a mix of debt and equity. We understand that UMW is expected to maintain its gearing ratio at around 0.5 times,” explains Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings. To achieve this, the Group is likely to fulfil its funding needs through equity. “Should this fall through, UMW may scale down its budgeted O&G capex from 2014 onwards. In line with this, the Group’s adjusted FFO debt cover is anticipated to exceed 0.4 times over the next 3 years,” adds Kevin.

In the meantime, the rating is moderated by fierce competition within the automotive industry, UMW’s vulnerability to economic cycles and changes in regulatory policies, as well as franchise-renewal and foreign-exchange risks, particularly when it comes to the US dollar. The Group is also exposed to contract-renewal risk as it has to constantly bid for new O&G jobs and actively pursue the renewal of expiring contracts to sustain its top line. We note that UMW may not necessarily have secured service contracts for its newly acquired/constructed rigs by the time they are completed.

Media contact

Woon Tien Ern

(603) 7628 1040

tienern@ram.com.my