RAM Ratings reaffirms AAA(s) rating of Muhibbah’s Islamic Bonds

Published on 19 September 2013

RAM Ratings has reaffirmed the AAA(s)/stable rating of Muhibbah Engineering (M) Bhd’s (“Muhibbah” or “the Group”) RM130 million Islamic Bonds.

The rating is supported by an irrevocable and unconditional guarantee from Malayan Banking Berhad (“Maybank”) (rated AAA/stable/P1 by RAM), to honour Muhibbah’s irrevocable and unconditional undertaking to purchase all the Islamic Bonds at the exercise price and cancel the facility upon the declaration of an event of default (“Purchase Undertaking”). The trustee, on behalf of the bondholders, will be able to call on the bank guarantee to honour Muhibbah’s Purchase Undertaking. The guarantee from Maybank enhances the credit profile of the Islamic Bonds beyond the Group’s inherent credit standing.

Muhibbah is chiefly involved in construction, crane manufacturing and shipbuilding. The Group also has associate stakes in a Malaysian road-maintenance concessionaire and an international airport concession in Cambodia.

Excluding the bank guarantee, Muhibbah’s credit profile is underscored by its established track record in the construction industry, specialising in oil-and-gas (“O&G”) related jobs, marine-engineering and civil-engineering works. Moving forward, the Group’s performance will continue to be supported by the bright prospects for both the domestic construction and O&G sectors. Given that the Group was recently awarded an offshore construction fabrication licence by Petroliam Nasional Berhad, we expect it to increasingly concentrate on O&G-related jobs, given the wider margins in the O&G industry and a comparatively less competitive landscape. That said, we are cautious of Muhibbah’s relatively small construction order book as at 3 July 2013, which might hamper its performance in the near term. Elsewhere, the Group derives earnings diversity from its involvement in crane-manufacturing and shipyard operations, and enjoys recurring dividend income from its associates.

Nevertheless, Muhibbah’s credit profile is moderated by its stretched balance sheet and tight liquidity position as it is heavily reliant on short-term borrowings to fund its working capital. RAM notes that the Group had sunk into the red for FY Dec 2012 as a result of hefty provisioning for the stalled Asia Petroleum Hub project. Excluding this item, the Group would have registered an improved pre-tax profit of RM210 million. Going forward, although the Group stands to benefit from the bright outlook on the O&G sector, the competitive operating environment in the infrastructure construction sector will continue to compress its profit margins in future jobs. The Group is also exposed to the cyclical nature of the construction and O&G industries, as well as foreign-exchange risk from its overseas operations.

Media contact

Jason Tan

(603) 7628 1030

jasontan@ram.com.my