RAM Ratings has reaffirmed the AAA/Stable/P1 ratings of UMW Holdings Berhad’s (UMW or the Group) RM300 million Islamic Commercial Papers/Medium-Term Notes Programme (2010/2017) and the AAA/Stable rating of the Group’s RM2 billion Islamic Medium-Term Notes Programme (2013/2028).

Published on 08 July 2015

The ratings continue to reflect UMW’s strong market position in the domestic automotive, jack-up rig and equipment sectors as well as its robust financial profile. The Group’s 51%-owned UMW Toyota Motor Sdn Bhd has been leading the non-national segment of the Malaysian automotive industry for the past 25 years, although it had recently lost ground to its closest competitor, Honda. In 1Q 2015, Toyota’s market share shrank with its total industry volume coming behind Honda. We expect the local car industry to remain keenly competitive, with many players facing eroding margins. Meanwhile, including its associate, Perusahaan Otomobil Kedua Sdn Bhd, UMW boasted a combined 44.7%-share of domestic total industry volume in 2014, making it the leading automotive group in Malaysia.

In the oil and gas (O&G) sector, UMW is the largest Malaysian owner and operator of jack-up rigs and a notable regional player. Nonetheless, UMW’s drilling business faces heightened contract-renewal risk, given that 5 out of its current 7 drilling rigs are up for contract renewal this year, not including a new rig to be delivered in September which has yet to secure a contract. Utilisation levels and daily charter rates are expected to fall amidst intensified competition for drilling contracts following reduced spending by oil companies. However, we believe the Group’s young fleet (jack-up rigs with an average age of 2 years) will give it an edge in bids for drilling contracts while its venture overseas has also diversified its prospects.

For FY Dec 2014, UMW’s gearing ratio and funds from operations (FFO) debt cover remained strong at 0.44 times and 0.38 times, respectively, coming in within our expectations. Including its large cash reserves and liquid money-market funds, the Group was in a net-cash position. Utilising a mix of debt and equity, UMW will spend RM1.6 billion to acquire 2 new jack-up rigs in FY Dec 2015. Following the delivery of a new rig earlier this year, the Group’s debts had grown to RM5.0 billion as at end-March 2015, with a corresponding gearing ratio of 0.52 times.

“Over the next 2 years, UMW’s gearing ratio is expected to range between 0.5 times and 0.6 times while its net gearing ratio is not anticipated to exceed 0.25 times,” said Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. “However, we foresee its FFO debt cover deteriorating to about 0.25 times in fiscal 2015 before improving towards 0.30 times next year,” he added. Combined with the Group’s large cash reserves and liquid money-market funds, its net gearing ratio is likely to remain below 0.1 times over the next 2 years.

In addition to aggressive competition in the automotive industry and heightened contract-renewal risk faced by UMW’s drilling business, the ratings are moderated by the Group’s vulnerability to business cycles and regulatory policy changes as well as franchise non-renewal risk. We also highlight that continued substantial losses stemming from UMW’s value group will weigh down the Group’s overall profitability.

UMW is an investment-holding company involved in the assembly and distribution of Toyota vehicles, trading in heavy- and industrial-equipment (Komatsu, Toyota, Case and Bomag, among others), provision of O&G services (with drilling and oil-field services as core offerings) as well as the manufacture of automotive parts and distribution of lubricants (Pennzoil and Repsol).

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Ben Inn

(603) 7628 1024

ben@ram.com.my