RAM Ratings has downgraded the long-term ratings of UMW Holdings Berhad’s (UMW or the Group) Islamic Debt Programmes to AA2 from AAA and revised the rating outlook to stable from negative.

Published on 19 July 2016

RAM Ratings has downgraded the long-term ratings of UMW Holdings Berhad’s (UMW or the Group) Islamic Debt Programmes to AA2 from AAA and revised the rating outlook to stable from negative. Concurrently, its short-term issue rating of P1 has been reaffirmed. The Group’s Islamic Debt Programmes consist of a RM300 million ICP/MTN Programme (2010/2017) and a RM2 billion IMTN Programme (2013/2028). The downgrades are premised on a weakened operating performance and financial profile, which are not expected to recover significantly at least over these 2 years. Substantially lower earnings as a result of continued challenging operating conditions together with expected higher debt requirements had led to a weaker financial profile.

Since last year, UMW’s automotive division has suffered significant margin compression from a higher cost structure as a result of the severely devalued ringgit. At the same time, intense competition saw Toyota losing market share and its leading position in the non-national segment of the domestic automotive industry. Elsewhere, the Group’s oil and gas (O&G) segment sank into losses owing to poor utilisation levels, lower daily charter rates and hefty asset impairment charges. We note that only 1 of the division’s 8 rigs is currently hired out while 2 rigs are expected to commence new contracts in 4Q this year. This segment was significantly impacted by slower activity in the O&G sector brought on by the continued weak outlook on crude prices.

Operational challenges in FY Dec 2015 resulted in UMW’s operating profit before depreciation, interest and tax plummeting 45.9% y-o-y to RM865.00 million and almost wiped out its net profit after including impairments (FY Dec 2014: RM1,213.01 million). Meanwhile, the Group’s funds from operations (FFO) tumbled 37.7% y-o-y to about RM1 billion (FY Dec 2014: RM1,608.18 million). Coupled with a substantially enlarged debt load of RM6.01 billion as at end-December 2015, UMW’s respective adjusted gearing ratio and FFO debt coverage weakened to 0.65 times and 0.17 times (FY Dec 2014: 0.45 times and 0.38 times, respectively).

“We expect the operating environments of the automotive and O&G sectors to remain tough this year, likely resulting in a further slight deterioration in earnings. Nonetheless, operating conditions are anticipated to improve gradually from FY Dec 2017, supported by an expected stronger ringgit and better crude oil prices. The introduction of new and refreshed Toyota models are also envisaged to improve sales,” said Kevin Lim, RAM’s Head of Consumer and Industrial Ratings.

“Moving forward, UMW will incur up to RM2.5 billion to build new plants for automotive assembly and jet engine fan casing manufacturing operations. Combined with an expected weak earnings performance over the near term, the Group’s debt levels are anticipated to continue to rise, with its gearing peaking at 0.7 times this year and gradually ameliorating over the next couple of years. Meanwhile, FFO debt coverage will dip further in the current fiscal year before improving towards 0.25 times in FY Dec 2018,” Lim adds. The revised outlook on the long-term ratings is reflective of the gradual improvement in the Group’s operating and financial performance that we envisage from FY Dec 2017.

UMW’s ratings are supported by its strong market position in the domestic automotive, jack-up rig and equipment sectors as well as its adequate balance sheet strength. The ratings are, however, moderated by the Group’s weaker cashflow protection metrics, aggressive competition within the automotive industry, the weak drilling contract-renewal outlook and franchise non-renewal risk. Additionally, we highlight that continued substantial losses stemming from UMW’s value group will further weigh down the Group’s profitability.

UMW is an investment-holding company involved in the assembly and distribution of Toyota vehicles, trading in heavy and industrial equipment, the provision of O&G services, manufacture of automotive parts and distribution of lubricants. Including luxury brand, Lexus, and associate, Perusahaan Otomobil Kedua Sdn Bhd, the enlarged group commands the largest share of total industry volume at 46.4% and caters to almost all segments of the local automotive sector.

Media contact
Ben Inn
(603) 7628 1024
ben@ram.com.my