FW: RAM Ratings reaffirms Mudajaya's A2/P2 ratings, maintains negative outlook

Published on 23 Feb 2018.

 

RAM Ratings has reaffirmed the A2/P2 ratings of Mudajaya Corporation Berhad’s (Mudajaya Corp) Islamic MTN Programme (2014/2029) and Islamic CP Programme (2014/2021). Concurrently, we have retained the negative outlook on the long-term rating. Mudajaya Corp is wholly owned by Mudajaya Group Berhad (Mudajaya or the Group); its credit profile reflects that of its parent.

The reaffirmation is premised on the potential improvement in the Group’s profit performance, backed by sustained order-book replenishment and the progressive completion of contracts in hand. The conclusion of negotiations on Mudajaya’s variation order (VO) claims in respect of its 3 earlier projects has also eliminated uncertainties and the risk of further impairments.

Mudajaya incurred substantial and larger-than-expected pre-tax losses of RM377.53 million and RM104.30 million in FY Dec 2016 and 9M FY Dec 2017, respectively. This was due to impairments in relation to its power-plant construction projects and a windfarm investment in the Philippines, the additional costs of 2 of its older construction projects, as well as the Group’s share of the losses of its India-based power asset under its 26%-owned associate, RKM Powergen Pte Ltd. Following capital erosion from such losses, its gearing ratio had worsened significantly to 0.83 times as at end-September 2017, from 0.56 times a year earlier.  

Excluding the impact of non-cash items, however, Mudajaya’s operating profit before depreciation, interest and tax (OPBDIT) leapt up to RM59.5 million in 9M fiscal 2017 (9M fiscal 2016: RM12.0 million), driven by the stronger margins of its existing contracts and the reversal of impairment following the recovery of an insurance amount for the Tanjung Bin project. Accordingly, its annualised funds from operations debt coverage (FFODC, after adjusting for pledged cash) turned out better than expected at 0.14 times. 

The conclusion of negotiations over Mudajaya’s VO claims for its 3 earlier projects had resulted in a substantial RM227 million impairment on its bottom line in both fiscal 2016 and 9M fiscal 2017. Nevertheless, the Group received about RM157 million as settlement amounts and insurance claims for these projects last year. These events have also eliminated the uncertainties over its claims in respect of the 3 projects, which will involve no further impairment.

Mudajaya continued to clinch jobs in 9M 2017, with about RM1.4 billion of contracts to date. This has eased concerns over order-book replenishment. Its outstanding order book was maintained at a robust RM2.7 billion as at end-October 2017, which should sustain it over the next few years. Mudajaya’s top line and OPBDIT are anticipated to improve going forward, on the assumption of successful execution of contracts in hand. Consequently, its FFODC may hover at the current level over the next 1-2 years while its gearing ratio (excluding concession-related debts) could breach 0.9 times due to its smaller capital base and in the event of unsuccessful asset disposal. There is, however, upside potential to these metrics as the management plans to monetise non-core assets to pare down its borrowings. 

The negative outlook reflects the uncertainties over the Group’s ability to sustain credit metrics that are commensurate with its A2/P2 ratings. Slow execution of secured contracts had resulted in lower-than-expected construction revenue in 9M FY Dec 2017 (-25% y-o-y). Its projected credit metrics are also still short of those required for its A2/P2 ratings. Moreover, the Group could keep incurring its share of losses under RKM Powergen, given that it is still uncertain when power sales from the plant’s completed Unit 2 will commence; Units 3 and 4 are slated for completion in fiscal 2018. 

 

Analytical contact
Karin Koh, CFA
(603) 7628 1174
karin@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my