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

Published on 29 August 2014

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 AAA-rated Malayan Banking Berhad (Maybank) to honour Muhibbah’s irrevocable and unconditional undertaking to purchase the Bonds at the exercise price and cancel them 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 Bonds beyond Muhibbah’s stand-alone credit strength.
Muhibbah is 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 supported by its established track record within the construction industry, specialising in oil and gas (O&G)-related jobs as well as marine and civil engineering works. Offering a wide suite of O&G services, the Group is expected to benefit from an uptick in domestic O&G activities, especially from Petronas’s Refinery and Petrochemical Integrated Development project. Elsewhere, Muhibbah’s wide geographical presence and diverse income sources from its involvement in crane and ship manufacturing, as well as recurring dividend income from associates alleviate the Group’s dependence and exposure to any single sector or country.
Notwithstanding a softer operating performance in FY Dec 2013, attributable to reduced construction and shipbuilding activities, Muhibbah’s financial profile improved, as the completion of major projects and decreased working capital amid slower job flows eased its debt requirements. The lower debt level reduced the Group’s gearing ratio to 1.16 times (end-December 2012: 1.80 times), while higher cash balances improved its net gearing ratio to 0.60 times (end-December 2012: 1.25 times). Its funds from operations debt cover stayed adequate at 0.18 times (FY Dec 2012: 0.24 times). We note that Muhibbah’s heavy reliance on short-term financing (end-December 2013: RM743.1 million, 84% of total debt) could potentially put it in a tight liquidity position, although some comfort is derived from the trade-financing nature of most of these short-term facilities and available credit lines of about RM1.1 billion that the Group can tap if required.
The rating is moderated by challenges and operating risks in the competitive construction and O&G sectors, with business cyclicality, contractual disputes and contract lumpiness culminating in a riskier-than-average industry profile. The Group is also exposed to some degree of forex risk from its overseas operations, which is, however, partly moderated by natural hedging and currency-hedging contracts. The different operating and regulatory environment in a foreign market further heightens the operational risk that the Group faces.

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Juliana Koay
(603) 7628 1169
juliana@ram.com.my