RAM Ratings reaffirms UMW's ratings

Published on 02 May 2014

RAM Ratings has reaffirmed the AAA/Stable/P1 ratings of UMW Holdings Berhad’s (UMW or the Group) RM300 million Islamic Commercial Papers/Medium-Term Notes Programme (2010/2017) as well as the AAA/Stable rating of the Group’s RM2 billion Islamic Medium-Term Notes Programme (2013/2028). UMW is an investment-holding company involved in the assembly and distribution of Toyota vehicles, trading in heavy- and industrial-equipment (Komatsu, Toyota, Case and Bomag, among others), provision of oil and gas (O&G) services (with drilling and oil field services as core offerings) as well as the manufacture of automotive parts and distribution of lubricants (Pennzoil and Repsol).
The ratings predominantly reflect UMW’s strong market position in the domestic automotive, equipment and jack-up rig sectors coupled with its strong financial profile. The Group, via 51%-owned UMW Toyota Motor Sdn Bhd, continued to lead the non-national vehicle segment in 2013. Including its associate, Perusahaan Otomobil Kedua Sdn Bhd (Perodua), UMW boasted a combined 43.8%-share of domestic total industry volume in 2013, making it the leading automotive group in Malaysia.
UMW is also a market leader in the domestic heavy- and industrial-equipment segments via best sellers Komatsu and Toyota, respectively. In the O&G sector, UMW is the largest Malaysian owner and operator of jack-up rigs. The Group stands to benefit from the policies of the Malaysian Government and oil giant Petroliam Nasional Berhad (Petronas), which are designed to promote and develop domestic O&G players.
In FY Dec 2013, UMW’s adjusted gearing ratio and funds from operations (FFO) debt cover ratio of 0.34 times and 0.49 times, respectively, were within our expectations. Going forward, the Group will spend RM1.90 billion to acquire 3 new jack-up rigs and a hydraulic workover unit. We understand that management will rely on a mix of debt and equity for this capex with the aim of maintaining UMW’s gearing ratio at around 0.50-0.60 times, slightly higher than our expected 0.50 times. “Nonetheless, we note that the Group’s net gearing ratio will remain strong at about 0.30 times,” said Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. “Accordingly, we anticipate UMW’s adjusted FFO debt cover ratio to sum up to around 0.40 times,” he adds. That said, we highlight that continued substantial losses stemming from UMW’s value group will weigh down the Group’s overall profitability.
The ratings are moderated by fierce competition within the increasingly mature automotive industry, UMW’s vulnerability to economic cycles and regulatory policy changes, as well as franchise non-renewal risk and forex risk, particularly with respect to the US dollar. The Group is also exposed to contract-renewal risk as it has to constantly bid for new O&G jobs and actively pursue the renewal of expiring contracts to sustain its top line. UMW’s 3 jack-up rigs (i.e. Naga 2, Naga 3 and Naga 5) will be up for renewal in less than 12 months. In addition, 3 new rigs, which will be coming on board in the next 2 years, have yet to secure any contracts. While 12 jack-up drilling rig contracts within Malaysian waters will expire this year, it remains to be seen if UMW is able to replace these expiring contracts. We highlight that management’s near-term strategy to bid for short-term contracts (to enjoy higher daily charter rates) heightens contract-renewal risk and affects earnings stability over this period.
UMW will own 8 jack-up rigs by 2015, twice the number it currently owns. RAM highlights that the aggressive pace of expansion may strain the Group’s balance sheet and coverage ratios. As such, we remain cautious in respect of the impact of further aggressive expansion, particularly that which is debt-funded, on UMW’s financial metrics and its bearing on the Group’s existing rating.

Media contact
Woon Tien Ern
(603) 7628 1040
tienern@ram.com.my