Wednesday, March 29, 2017

MARC AFFIRMS ITS AA-IS RATING ON MALAYSIA MARINE AND HEAVY ENGINEERING HOLDINGS’ SUKUK MURABAHAH PROGRAMME OF UP TO RM1.0 BILLION



MARC has affirmed its AA-IS rating on Malaysia Marine and Heavy Engineering Holdings Berhad’s (MHB) RM1.0 billion Sukuk Murabahah Programme. The outlook is maintained at negative.

The continued negative outlook reflects MHB’s weakening profitability metrics due to higher impairment charges and lower contribution from its key heavy engineering unit (HEU) arising from reduced contract flow. These factors notwithstanding, MHB’s standalone rating is supported by its strong liquidity position and very low borrowings amounting to RM20.0 million under the rated sukuk programme. MHB’s affirmed rating incorporates a one-notch rating uplift, premised on its status as a member of the PETRONAS group (AAA/Stable), which remains the company’s main source of contracts.

MARC observes MHB’s contract order book has remained historically low at RM1.1 billion as at end-2016, underscoring the difficult environment for upstream players in the oil and gas (O&G) sector. Its current order book size, which includes contracts worth RM962 million secured in 2016, should increase in the near term on expectations that it is likely to secure additional contracts from its sizeable tender book of RM4.4 billion. The recent contracts awarded are, however, relatively smaller in value with shorter tenures.

MARC also notes that MHB has increased its focus on expanding the ship repairing business under its marine business unit (MBU) segment to counter the weak prospects in offshore engineering activities. MHB completed 54 vessel repair assignments in 2016 and expects to increase this number in 2017. MHB is also in the midst of securing board approval to construct a third drydock with an estimated cost of RM500 million which is expected to boost the earnings of its MBU segment in the medium term. Capital expenditure has remained subdued in recent years, decreasing to RM122.2 million in 2016 from RM152.2 million in 2015. The company has also reduced the pace of its yard optimisation programme by spending only RM56 million in 2016, mainly for the Goliath crane 1 and centralising its piping workshop and warehouse.

For unaudited 2016, MHB recorded a 51.7% decline in consolidated revenue to RM1,191.3 million and a pre-tax loss of RM135.0 million (2015: pre-tax profit of RM22.5 million). The loss was due to a one-off impairment charge of RM140.5 million; excluding the impairment charge, MHB would have recorded a marginal pre-tax profit of RM5.5 million. Cash flow from operations was negative RM106.5 million due mainly to the timing of collection following project payment milestones. As a consequence, MHB’s cash balance declined to RM671.1 million as at end-2016 from RM860.2 million in the previous year. Given its total borrowings of RM20.0 million against shareholders’ funds of RM2.6 billion as at end-2106, MHB has significant headroom to raise external funding for working capital requirements. 

The standalone rating would be lowered if MHB’s performance continues to weaken such that its standalone credit profile falls below the current rating band. Conversely, the negative rating outlook will be revised to stable if MHB is able to sustain a meaningful order book replenishment that would reverse its declining revenue and earnings trend.

The full Credit Analysis Report will be made available on MARC’s website at www.marc.com.my.


Contacts: Afeeq Amiri, +603-2082 2256/ afeeqamiri@marc.com.my, Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my

March 29, 2017

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