RAM Ratings downgrades Eversendai's ratings to A2 from AA3

Published on 24 June 2015

RAM Ratings has downgraded the ratings of Eversendai Corporation Berhad’s (the Group) RM500 million Sukuk Musharakah ICP/MTN to A2/Stable/P1 from AA3/Negative/P1. The downgrade reflects the considerable weakening of Eversendai’s balance sheet and debt-protection metrics over the past 2 years vis-à-vis expectations during our initial rating. In addition, while the Group still possesses a strong business position in structural steel works, its profitability has declined due to variation works on 2 projects with sizeable outstanding claims pending finalisation and softer project margins.
Following an increase in Eversendai’s debts to facilitate its investment in the oil and gas (O&G) fabrication business and acquisition of land in 2013, the Group’s balance sheet had weakened. Its adjusted gearing ratio – which includes the present value of its 25-year operating lease commitments for its Ras Al Khaimah fabrication yard – had spiked to 0.79 times as at end-December 2014 compared to 0.33 times 2 years earlier. Our estimations indicate that Eversendai’s debt level and gearing ratio could edge up further to support its working capital needs amid plans to double its top line to RM2 billion by 2017. Exacerbated by a fall in funds from operations (FFO), the Group’s adjusted FFO debt cover clocked in at 0.13 times for 2014 (2013: 0.14 times) following debt-funded expansion. Although this ratio is anticipated to recover to 0.15-0.18 times (sensitised basis) over the next 2 years, helped partially by a large related-party contract for the construction of liftboats, these levels are no longer commensurate with an AA3-rating.
Over the past couple of years, the Group’s operating profit before depreciation, interest and tax (OPBDIT) had plummeted, primarily dragged down by variation works in 2 projects in Qatar and India. Although variation claims are being pursued for these projects, Eversendai’s adjusted OPBDIT margin had slipped into single-digit territory, clocking in at 6.7% for 2014 – in contrast with mid-teen margins just a few years back. On a brighter note, aided by its O&G division which has begun to contribute positively to Eversendai’s bottom line, the Group’s pre-tax profit improved to RM21.2 million for 1Q FY 2015 (1Q FY 2014: RM11.3 million), which is in line with our expectation.
Despite Eversendai’s aggressive move into the O&G fabrication space, traction in job wins has yet to be demonstrated. In addition, Eversendai bore impairment losses on its equity investment in a Singapore-listed O&G outfit in 2013. The Group may, in our view, require time to build a track record in this arena, particularly as prospects for the segment are believed to have abated following the plunge in the oil price since 2H 2014. We note that Eversendai is bidding for a number of projects, summing up to about RM4 billion in this sector, which it expects to secure in 2H 2015 and 2016. Projects in the O&G fabrication industry while entailing a high degree of execution risk, could provide a boost to Eversendai’s margins, if well executed.
On balance, the Group’s aptitude in securing jobs in the structural steel space remains intact in our view. This is supported by its established credentials in globally high-profile undertakings, commendable execution of complex projects, and its track record of timely project delivery. Furthermore, construction prospects in Eversendai’s key markets of the Middle East remain healthy, and should present considerable opportunities for order-book replenishment. In 1Q 2015 alone, the Group announced RM864 million worth of jobs secured, surpassing the amount clinched throughout 2014 (if the said liftboat contract could be excluded), alleviating some earlier concerns on its job pipeline. With these wins, Eversendai’s outstanding order book as at end-March 2015 advanced to RM2.0 billion (end-December 2014: RM1.4 billion), and remains diversified geographically.

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