Friday 29 Mar 2024
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KUALA LUMPUR (April 20): RAM Ratings Services Bhd has rated UMW Holdings Bhd’s RM2 billion perpetual sukuk programme A1 and reaffirmed its AA2 rating on the group’s RM2 billion Islamic MTN programme, as a result of its 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,” RAM Ratings said in a statement today. 

Provided its proposed acquisitions materialise, UMW will become Malaysia’s largest automotive group, with nearly half of the market share by 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,” RAM said.   

The total consideration for the proposed acquisition would amount to about RM1.4 billion, nearly 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,” RAM added.

The proposed acquisitions are still pending acceptance of offer from relevant parties. The validity period for the offer will expire on April 30, 2018. 

Due to lower impairments and smaller losses in the oil and gas (O&G) industry, the group’s pre-tax loss dropped from RM2.13 billion in financial year ended December 2016 (FY16) to RM549.94 million in FY17.  

The weak ringgit, however, hampered the earnings and margins of UMW’s largest unit, 51%-owned UMW Toyota Motor Sdn Bhd, despite better-than-expected unit sales and earnings. 

Discounting losses in the group’s O&G businesses, UMW would have recorded a pre-tax profit of RM409.06 million in FY17. 

Kevin Lim, RAM’s head of consumer and industrial ratings, notes that cost pressures have eased and should moderate as the ringgit stabilizes. 

“Over the next three 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,” Lim added. 

Additionally, RAM said it anticipates sales of heavy and industrial equipment, automotive parts and lubricants will gradually increase over the next three years. 

The ratings agency also expects UMW’s balance sheet to remain healthy over this period.  

“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 two 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 FY19 and FY20, respectively,” RAM Ratings added.

The group’s proposed perpetual sukuk is rated two notches below UMW’s long-term corporate credit rating, which RAM said “reflects 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.”

RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating and 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,” the statement said.

“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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