RAM Ratings has lifted the Negative Rating Watch on the A2/P2 ratings of Mudajaya Corporation Berhad’s (Mudajaya Corporation) Islamic CP/MTN Programme and revised the outlook on the long-term rating to negative.

Published on 24 Jan 2017.

RAM Ratings has lifted the Negative Rating Watch on the A2/P2 ratings of Mudajaya Corporation Berhad’s (Mudajaya Corporation) Islamic CP/MTN Programme and revised the outlook on the long-term rating to negative. Mudajaya Corporation is a wholly owned subsidiary of Mudajaya Group Berhad (Mudajaya or the Group) and its credit profile reflects that of the latter.

To recap, the Rating Watch (placed on 16 December 2016) was premised on RAM’s concerns over lingering uncertainties on the repayment of RM240 million of MTNs due on 23 January 2017 and the Group’s weak YTD Sep 2016 performance. While the Group was already in the midst of securing funds for the redemption at the time, the possibility of the plan falling through had remained. 

On 23 January 2017, the Group had successfully repaid the RM240 million of MTNs after raising the requisite funds via the issuance of Euro MTNs and the drawdown of a term loan. The Rating Watch has accordingly been lifted.

On the other hand, the negative outlook reflects our reservations on the Group’s weak 2016 performance as well as its ability to achieve and maintain financial metrics that are in line with its A2/P2 ratings, going forward. For 9M 2016, Mudajaya registered an unexpected and deep pre-tax loss of RM133.80 million due to additional costs incurred for 2 older construction projects and losses from investments in the power sector. 

Absolute funds from operations (FFO) fell from about RM30 million in 1H 2016 to only RM6.87 million in 9M 2016, mainly as a result of the said additional costs, and is contrary to our expectation that the Group’s construction business would no longer suffer hefty losses. Consequently, Mudajaya’s FFO debt coverage ratio for the period came in at only 0.02 times – well below our expectations and downgrade trigger (0.15 times). We note that Mudajaya does not envisage further project finalisation costs for these projects and expects the construction division to return to profitability in the coming quarters – although this remains to be seen. 

As some of the variation order (VO) claims related to these old projects had been recognised as revenue previously, there could be reversals should actual VOs approved fall short of the amount already recognised. These non-cash adjustments will be negative for capitalisation. A case in point is the recent adjudication outcome for the Janamanjung power plant project which is expected to have a negative RM98.35 million impact on earnings. With a gearing ratio of 0.56 times as at end-September 2016, however, Mudajaya still has space to withstand some degree of deterioration in this metric over the next 1-2 years.  

Meanwhile, the Group’s order book replenishment in 2016 had been largely listless until December, when it announced 3 new contracts worth RM1.7 billion in quick succession. This lifted new job wins for the year to about RM2.0 billion (from RM750 million in 2015). However, as these were only secured in late 2016, the financial effects will take time to show and the contracts will be spread out over 2-5 years. 

All in all, the recent surge in new contract wins suggests that Mudajaya’s financial profile may yet recover, but the momentum of order book replenishment and job commencement will have to be maintained (or increased) in 2017 and beyond for this to happen. The successful execution of jobs on schedule and within budget would also be crucial. 

Elsewhere, Mudajaya’s investments in the power sector have yielded unexpected losses (9M 2016: segmental loss before tax of RM112 million), attributable to its share of losses in a 26%-owned associate in India and impairment of the Group’s investments in the Philippines. Although these losses have no cashflow impact, the erosion of accumulated earnings is negative for Mudajaya’s capitalisation. Looking ahead, the Group is mulling additional investments in the power sector to expand its recurring income base over the longer term. Some of these are expected to have long gestation periods and will not be earnings/cashflow accretive in the near term. 

In the coming months, RAM will monitor the pace of new contracts secured by Mudajaya, the job commencement/execution trend, the Group’s investments in the power sector as well as the impact of these developments on its credit risk profile. 

Mudajaya Corporation’s Islamic CP/MTN Programme consists of an Islamic Medium-Term Notes Programme (2014/2029) and an Islamic Commercial Papers Programme (2014/2021) with a combined limit of RM1.0 billion.

Analytical contact
Chuan Shyang Lin
(603) 7628 1068
shyanglin@ram.com.my

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