MARC has affirmed its AA-IS
rating on Malaysia Marine and Heavy Engineering Holdings Berhad’s
(MHB) RM1.0 billion Sukuk Murabahah Programme. The outlook is maintained at negative.
The continued negative outlook reflects MHB’s
weakening profitability metrics due to higher impairment charges and lower
contribution from its key heavy engineering unit (HEU) arising from reduced contract
flow. These factors notwithstanding, MHB’s standalone rating is supported by
its strong liquidity position and very low borrowings amounting to RM20.0
million under the rated sukuk programme. MHB’s affirmed rating incorporates a
one-notch rating uplift, premised on its status as a member of the PETRONAS
group (AAA/Stable), which remains the company’s main source of contracts.
MARC observes MHB’s contract order book has
remained historically low at RM1.1 billion as at end-2016, underscoring the
difficult environment for upstream players in the oil and gas (O&G) sector.
Its current order book size, which includes contracts worth RM962 million
secured in 2016, should increase in the near term on expectations that it is
likely to secure additional contracts from its sizeable tender book of RM4.4
billion. The recent contracts awarded are, however, relatively smaller in value
with shorter tenures.
MARC also
notes that MHB has increased its focus on expanding the ship repairing business
under its marine business unit (MBU) segment to counter the weak prospects in
offshore engineering activities. MHB completed 54 vessel repair assignments in
2016 and expects to increase this number in 2017. MHB is also in the midst of
securing board approval to construct a third drydock with an estimated cost of
RM500 million which is expected to boost the earnings of its MBU segment in the
medium term. Capital expenditure has remained subdued in recent years,
decreasing to RM122.2 million in 2016 from RM152.2 million in 2015. The company
has also reduced the pace of its yard optimisation programme by spending only
RM56 million in 2016, mainly for the Goliath crane 1 and centralising its
piping workshop and warehouse.
For unaudited
2016, MHB recorded a 51.7% decline in consolidated revenue to RM1,191.3 million
and a pre-tax loss of RM135.0 million (2015: pre-tax profit of RM22.5 million).
The loss was due to a one-off impairment charge of RM140.5 million; excluding
the impairment charge, MHB would have recorded a marginal pre-tax profit of
RM5.5 million. Cash flow from operations was negative RM106.5
million due mainly to the timing of collection following project payment
milestones. As a consequence, MHB’s cash balance declined to RM671.1 million as at
end-2016 from RM860.2 million in the previous year. Given its total borrowings
of RM20.0 million against shareholders’ funds of RM2.6 billion as at end-2106,
MHB has significant headroom to raise external funding for working capital
requirements.
The standalone rating would be lowered if MHB’s
performance continues to weaken such that its standalone credit profile falls
below the current rating band. Conversely, the negative rating outlook will be
revised to stable if MHB is able to sustain a meaningful order book replenishment
that would reverse its declining revenue and earnings trend.
Contacts: Afeeq Amiri, +603-2082 2256/ afeeqamiri@marc.com.my, Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my
March 29, 2017
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