Tuesday, May 9, 2017

RAM Ratings reaffirms UMW’s sukuk ratings despite deep losses


Published on 09 May 2017.

RAM Ratings has reaffirmed the AA2/Stable/P1 ratings of UMW Holdings Berhad’s (UMW or the Group) Islamic debt programmes. Despite the Group’s significant losses and impairments in FY Dec 2016, the reaffirmation of the ratings is premised on the anticipated strengthening of its balance sheet and earnings, through corporate exercises that will see UMW exiting from the oil and gas (O&G) sector. The completion of these corporate exercises will favourably alter the Group’s financial profile and relieve it of the losses suffered by its O&G operations.
UMW expects the distribution of its entire shareholding in UMW Oil & Gas Corporation Berhad (UMW O&G) and the substantial disposal of its unlisted O&G businesses to be wrapped up in 3Q 2017 and by year-end, respectively. “As the debts of UMW O&G constituted nearly two-thirds of the Group’s borrowings as at end-December 2016, UMW’s post-demerger balance sheet is envisaged to emerge stronger,” points out Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. The Group’s debt load is estimated to come in at RM2.8 billion by end-December 2017, with corresponding gearing and net gearing ratios of below 0.70 and 0.45 times, respectively. 
“While UMW is exiting its O&G operations, we highlight that delays in the completion of this exercise and/or the mounting losses of these businesses will substantially erode its retained earnings, thereby weakening its financial profile,” adds Lim. The Group’s ratings will likely face downward pressure if its efforts to exit from its O&G operations were to be shelved or significantly delayed. There remain notable milestones to completion for the demerger exercise, whilst the disposal of the unlisted O&G businesses could take longer as the Group has been on the lookout for potential suitors for a number of years. Meanwhile, the recent termination of the proposed acquisition of Icon Offshore Berhad and Orkim Sdn Bhd by UMW O&G will have no impact on UMW’s demerger exercise.
In FY Dec 2016, all of UMW’s divisions delivered poor performances, causing a 24.1% y-o-y decline in revenue to RM10.96 billion and shrinking its operating profit before depreciation, interest and tax by 72.6% to RM236.87 million. The Group’s automotive division continued to face intense competition while its margins were compressed by higher imported costs, following the persistent weakness of the ringgit. Meanwhile, the losses of the Group’s O&G segment deepened as the sector remained mired in one of the worst downturns in recent history.
Besides its poor operating performance, a hefty RM1.24 billion of impairments and RM750 million of provisions relating to guarantees on the debts of a joint venture in O&G operations had led to UMW reporting a bruising RM2.13 billion pre-tax loss in fiscal 2016. Given the substantial erosion of its shareholders’ equity and a heavier debt burden of RM6.36 billion as at end-December 2016, the Group’s adjusted gearing ratio deteriorated to 0.94 times (end-December 2015: RM6.01 billion and 0.65 times). The impairments were larger than estimated while the provision was also unexpected, resulting in a weaker balance sheet.
Moving forward, UMW is likely to record another loss this year, albeit lower, as losses from its O&G operations will continue eroding its earnings until their demerger and disposal in 2H 2017. Nonetheless, we anticipate the Group’s performance to gradually pick up from the current year, supported by better automotive sales following the launch of new models last year, tax incentives from the energy-efficient vehicle classification and the expected stabilisation of the ringgit. Contributions from the manufacturing of aero engine fan cases are also envisaged to commence next year. The Group’s funds from operations debt cover is projected to improve to between 0.20 and 0.25 times in FY Dec 2018 and 2019.
UMW’s RM300 million ICP/MTN Programme (2010/2017) and RM2 billion IMTN Programme (2013/2028) are rated AA2/Stable/P1 and AA2/Stable, respectively. 

Analytical contact
Ben Inn
(603) 7628 1024
ben@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

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