Published on 13 Dec 2017.
RAM Ratings has assigned an AAA(fg) rating with a stable outlook to KMCOB Capital Berhad’s (KMCOB) RM320 million Guaranteed Serial Bonds (2013/2020) (Guaranteed Bonds). The rating reflects the unconditional and irrevocable financial guarantee on the bonds provided by Danajamin Nasional Berhad (Danajamin). KMCOB has extended the maturity dates of the remaining outstanding Series E (RM55 million) and Series F (RM50 million) of the Guaranteed Bonds by 2 years to 14 December 2019 and 14 December 2020, respectively. Concurrently, Danajamin has extended its financial guarantee up to the said dates. The guarantee enhances the credit profile of the bonds beyond KMCOB’s credit strength. As KMCOB is a funding conduit of Scomi Oilfield Limited (SOL or the Group), its credit profile mirrors that of SOL.
SOL has a commendable track record in the provision of drilling fluids (DF) and drilling waste management (DWM) services, backed by decades of experience and a reputation as a reliable oilfield service provider. Among the leaders in the DF and DWM services segments, SOL competes with the 3 largest players in the markets in which it operates. The Group is geographically diversified, being present in over 21 countries, with notable operations in Malaysia, Indonesia, Thailand, Myanmar, Russia, Turkmenistan, Congo, Nigeria and India. Revenue from overseas operations has averaged about 80% of its top line over the last 5 years. Such diversity reduces SOL’s exposure to and dependence on any particular market segment or region.
That said, SOL’s performance has been badly affected by the oil price slump that started in mid-2014. Protracted low oil prices have led to a dearth of new contracts across the O&G value chain. In FY Mar 2017, the Group’s top line was down to a third of the level seen 2 years earlier while it also went into losses. Furthermore, the global oilfield services industry is highly competitive, with several large contenders offering services in the same realm as SOL. As a relatively smaller player, the Group faces stiff competition from larger multinational oilfield service providers.
The Group’s poor earnings and resultant weak cash generation had led to a tight liquidity position, with a cash balance of only US$18.20 million against short-term debts of US$54.69 million as at end-March 2017. This had necessitated the rescheduling of SOL’s debts totalling US$23.02 million under the Guaranteed Bonds. Other than the US$11.86 million current portion due under the Guaranteed Bonds, the Group has US$28.47 million owing to holding and related companies, the repayment terms of which are not fixed. Additionally, SOL’s financial flexibility is limited as it has no unencumbered assets which can be pledged as security for a drawdown of additional borrowings.
Meanwhile, SOL’s debt levels had progressively decreased from US$153.28 million as at end-March 2014 to US$65.85 million as at end-March 2017 on account of steady debt repayments. Its adjusted gearing ratio had accordingly improved from a peak of 1.36 times as at end-March 2015 to 0.93 times as at end-March 2017. Considering its current poor earnings and cash generation, prospects for further debt reduction are limited in the immediate term. Future debt repayments are likely to be funded by proceeds from the sale of non-core businesses and assets.
Given the Group’s poor showing in FY Mar 2017, its funds from operations (FFO) dipped into deficit. Moving forward, SOL’s earnings and cashflow generation will remain weak for the immediate term before improving gradually owing to an expected increase in drilling activities. As such, the Group’s FFO debt coverage is anticipated to stay sluggish for FY Mar 2018 before expanding over the next 3 years.
Elsewhere, SOL’s DF and DWM businesses are order-book driven. Accordingly, there is an inherent need for the Group to constantly bid for and secure new contracts to sustain its revenue and profits. The slowdown in the sector had resulted in a lack of new contracts and downward adjustment to the Group’s order book, which stands at a substantially reduced US$215 million worth of jobs outstanding as at end-March 2017. Excluding replenishments and extensions, about half of its order book will expire by 2018.
Incorporated to facilitate the issuance of debt programmes, KMCOB is a wholly owned subsidiary of SOL, which in turn is fully owned by Bursa Malaysia-listed Scomi Energy Services Berhad (SESB). Scomi Group Berhad, also listed on Bursa Malaysia, is the ultimate holding company of these entities via its 65.7% shareholding in SESB.
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