Apr 2, 2014 -
MARC has affirmed its AAAID
rating on MISC Berhad's (MISC) RM2.5 billion Islamic Medium Term Notes (IMTN)
programme. The outlook on the rating is maintained at stable. The rating action
incorporates the group’s leading position in the LNG shipping segment derived
largely from its long-term contracts with its parent company Petroliam Nasional
Berhad (PETRONAS) as well as MISC’s moderate financial management policies and
strong financial flexibility due in part to its majority-ownership by the
national oil company. MARC continues to consider MISC as a strategically
important subsidiary of PETRONAS, on which the rating agency maintains a senior
unsecured rating of AAA/Stable based on public information. Accordingly, the
affirmed rating incorporates rating uplift from MISC’s standalone credit
profile due to very high parental support from PETRONAS. The support has been
well demonstrated through, among other measures, the recent full subscription
of rights issues in MISC and the extension of bridging loans to the company.
Operating a fleet of 128
vessels, of which 74% of the vessels are owned by the group, MISC is currently
among the top five largest shipping conglomerates in the world by market
capitalisation at RM25.4 billion as at end-December 2013 (FY2013). The group
provides fully integrated maritime, offshore floating solutions, heavy
engineering and logistics services; however, the largest contributors to
consolidated revenue are the liquefied natural gas (LNG) and petroleum shipping
segments, followed by the heavy engineering segment. While MISC’s diversified
vessel fleet provides some degree of revenue and cash flow stability, its LNG
shipping segment’s long-term contracts with PETRONAS continue to drive group
earnings and offset the recent weak performances of its petroleum and chemical
shipping segments. For FY2013, the LNG shipping segment provided about 30% and
61% of group revenue and pre-tax profit. MISC's operating relationship with
PETRONAS as a major provider of its LNG shipping requirements has provided
considerable competitive advantages to the company.
Notwithstanding the
aforementioned factors, MARC views that PETRONAS’ decision to acquire its own
LNG vessels directly will weigh on MISC’s LNG business growth. While MISC is
engaged as project manager and technical consultant for the construction of the
LNG newbuilds for PETRONAS, the company would need to develop its LNG business
outside the PETRONAS group. Meanwhile, the long-term nature of its LNG
contracts with PETRONAS will mitigate any impact on MISC’s medium-term
earnings. MARC also notes that as PETRONAS seeks to complement its LNG
transportation requirements by building its own LNG shipping capability, MISC
will not have to allocate sizeable capital resources for LNG vessel
construction.
The group’s petroleum and
chemical shipping segments are expected to continue to face challenging
conditions due to weak freight rates. Any improvement in the near term may be
supported by a moderation in vessel delivery which is expected to peak in 2013/2014.
MARC views positively the group’s efforts to rationalise the petroleum and
chemical shipping segments’ fleet by disposing older vessels, which should
reduce vessel operating costs and reduce the losses incurred by the segments.
As at end-December 2013, the number of vessels in the petroleum and chemical
shipping segments declined to 75 and 24 from 79 and 29 respectively in the
previous year.
During FY2013, revenue declined
marginally by 0.9% to RM8.97 billion (FY2012: RM9.05 billion) despite the commencement
of the operations of the LNG shipping business’ two new floating storage units
(FSU) and some improvement in freight rates in the chemical shipping segment.
The decline is attributable to the reduced vessel fleet size following the
rationalisation exercise and lower contribution of projects in the heavy
engineering segment. The group’s pre-tax profit was higher at RM2,227.7 million
(FY2012: RM1,516.7 million) attributed to lower operating cost and general and
administrative expenses, higher share of profit from joint ventures following
the lease commencement of the Gumusut-Kakap FPS and lower net vessel
impairments.
MARC expects MISC’s overall
capital expenditure to moderate in line with the group’s fleet rationalisation
programme, and fewer acquisitions of new vessels amid a still challenging
petroleum and chemical shipping environment. Most of the capital expenditure is
expected to be incurred for its yard optimisation programme in the heavy
engineering segment. During FY2013, the group registered positive free cash
flow due to lower capital expenditure in line with the group’s strategy of
downsizing its fleet. As at end-December 2013, the group has a total capital
commitment of RM3.5 billion, of which RM1.0 billion has been approved and
contracted. MARC views the group’s gearing level as moderate with a
debt-to-equity ratio of 0.40x; any potential increase in leverage level would
mainly arise from a yard optimisation programme being undertaken by its
subsidiary Malaysian Marine and Heavy Engineering Holdings Berhad (MHB).
MISC's affirmed rating also
reflects its manageable debt maturities and comfortable liquidity position. As
of end-December 2013, 33% of its total borrowings or RM3.39 billion is due in
2014. In addition to strong liquidity with cash balance of RM4.7 billion, MISC
also has the flexibility to refinance its upcoming repayment given its current
lower leverage position and its access to the debt and capital market.
The stable rating outlook on
MISC reflects MARC’s expectation of continued support from PETRONAS over the
next 12 to 18 months. However, any accelerated development of PETRONAS’ LNG
shipping capabilities to an extent that could potentially weaken MISC’s
existing relationship with its parent may prompt a reassessment of MISC’s
strategic importance to its parent.
Contacts:
Sharidan Salleh, +603-2082 2254/
sharidan@marc.com.my;
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my.
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