Published on 20 Apr 2018.
RAM Ratings has assigned a rating of A1 to UMW Holdings Berhad’s (UMW or the Group) RM2 billion Perpetual Sukuk Programme. Concurrently, the rating of UMW’s RM2 billion Islamic MTN Programme (2013/2028) has been reaffirmed at AA2, underpinned by the Group’s improving operating performance and financial profile. The ratings remain on Rating Watch with a positive outlook premised on UMW’s proposed acquisitions which could result in the Group owning a controlling stake in Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and MBM Resources Berhad (MBM). Despite the major shareholders of MBM having rejected the proposed acquisitions, UMW continues to pursue the proposed corporate exercises.
UMW posted a substantially narrower pre-tax loss of RM549.94 million in FY Dec 2017 (FY Dec 2016: RM2.13 billion loss), mainly owing to lower impairments and its share of the smaller losses of its O&G businesses. Further, the Group’s largest unit, 51%-owned UMW Toyota Motor Sdn Bhd (UMW Toyota), reported weaker earnings and margins as it suffered the effects of the weak ringgit despite registering better-than-expected unit sales and earnings. Excluding the losses and provisions relating to the O&G businesses, the Group would have recorded a pre-tax profit of RM409.06 million (FY Dec 2016: RM516.25 million).
“Over the next 3 years, UMW’s operating performance is anticipated to improve, supported by the better showing of its automotive, equipment and mechanical and engineering (M&E) divisions. Notably, cost pressures faced by the automotive division have started to ease this year and should moderate amid the strengthening of the ringgit,” points out Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. Elsewhere, sales of heavy and industrial equipment, automotive parts and lubricants are also anticipated to gradually increase over the next 3 years. The M&E division’s new aero engine fan-casing manufacturing operation will gradually ramp up production, leading to an improvement from its expected loss-making position this year and meaningful contributions from fiscal 2020 onwards.
We anticipate UMW’s balance sheet to remain healthy over the next 3 years. The Group’s debt load of RM2.76 billion as at end-December 2017, with a corresponding gearing ratio of 0.66 times (end-December 2016: RM6.36 billion, 0.93 times), is expected to increase to about RM3.5 billion by end-2018, before gradually reducing over the next 2 years. Gearing and net gearing levels are envisaged to respectively peak at around 0.7 and 0.45 times this year, and ease to below 0.60 and 0.30 times in the next 2 years. Supported by stronger earnings from key divisions and the narrower losses of its O&G businesses, FFO debt coverage is anticipated to improve to above 0.2 and 0.25 times in FY Dec 2019 and FY Dec 2020, respectively.
Meanwhile, the proposed acquisitions are still pending acceptance of offer from the relevant parties. The validity period for the offer will expire on 30 April 2018. If the proposed corporate exercises materialise, UMW is poised to become Malaysia’s largest automotive group, with a market share of close to half the total industry volume (TIV). Including Perodua’s complementary models, UMW’s enlarged automotive division offers models in almost all segments. Furthermore, MBM’s distribution franchises for Daihatsu and Hino will significantly expand UMW’s range of commercial vehicles.
Total consideration for the proposed acquisitions, amounting to about RM1.4 billion, will be almost entirely funded by equity. As such, we expect UMW’s balance sheet to strengthen post acquisition. Given that Perodua generates substantial earnings and cashflow, UMW’s debt coverage is also anticipated to improve.
The proposed perpetual sukuk is rated two notches below UMW’s long-term corporate credit rating to reflect the risk of deferrable profit distributions and the deeply subordinated right of the sukuk holders to claims in the event of insolvency, consistent with the criteria presented in RAM’s Equity Credit for Corporate Hybrid Securities, April 2016. The proposed hybrid security qualifies for 50% equity credit under our criteria paper. Nonetheless, the deferrable and cumulative periodic distributions are viewed as fixed charges – similar to interest payments on debts. Proceeds from the issuance of the proposed perpetual sukuk will largely be used to repay debts.
RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.
Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.
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