KUALA LUMPUR (Mar 16): Malaysian Rating Corp Bhd (MARC) has assigned a final rating of AA-IS with a stable outlook on Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) sukuk programme of up to RM1 billion.
The rating incorporates a one-notch uplift from MHB’s standalone rating based on MARC’s assessment on the likelihood of moderate support from MHB’s ultimate parent Petroliam Nasional Bhd (Petronas).
The support assessment has taken into consideration the business linkages between the two entities and Petronas’ strong representation on MHB’s board of directors.
Petronas’ interest in the group is via its 62.4%-owned subsidiary MISC Bhd (fundamental: 2; valuation: 1), which in turn has a 66.5% interest in MHB (fundamental: 1.4; valuation: 1.8).
In a statement today, MARC noted that since its initial assessment in February last year, MHB’s standalone profile has weakened, mainly due to a declining order book and weakening margins arising from competitive pressures in the offshore engineering works sector.
MHB’s order book of RM1.6 billion as at end-2014 provides earnings visibility until the first quarter of 2016.
"We view the group’s (MHB's) ability to restore its order book to healthier levels over the near term to be challenging in light of weakened prospects for the upstream oil and gas sector following the sharp plunge in crude oil prices in the fourth quarter of 2014," the rating agency said.
"Oil majors, including Petronas, have reduced capex or deferred/canceled projects, translating into weak order book replenishments for offshore oil and gas fabrication services providers. Nonetheless, MHB could secure contracts from Petronas given that the national oil company is still expected to spend RM54 billion in 2015, from an earlier forecast of RM60 billion.
"MHB’s strong domestic position in fabrication would underpin its ability to compete under Petronas’ policy of awarding contracts on a competitive basis," added MARC.
MHB is currently undertaking the Malikai TLP and SK316 projects for Sabah Shell Petroleum Co Ltd and Petronas Carigali Sdn Bhd respectively; these projects account for about 63% of the total order book and are expected to be completed by end-2015 and first quarter of 2016 respectively.
MARC also noted that MHB’s major capital expenditure (capex) programme remains its yard optimisation programme, which commenced in 2006, for which MHB has spent RM1.1 billion of the budgeted RM2.5 billion.
"While MHB has utilised internal funds and proceeds from its initial public offering listing in 2011 to fund its capex programme to date, part of the proceeds from the proposed sukuk issuance will be earmarked to meet its requirement of about RM233 million for FY15," it added.
Should MHB fully draw down under the sukuk programme, its pro forma debt-to-equity ratio would rise from a low 0.1 times as at end-FY2014 to a manageable 0.5 times.
Nevertheless, MARC said downward pressure on MHB’s standalone rating could emerge if the group is unable to replenish its order book to a level that would prevent its financial metrics from weakening.
"Any deterioration in its financial performance over the near term could also trigger an outlook revision and/or downward rating migration," it said.
MHB shares closed down 1.65% to close at RM1.19 today, bringing a market capitalisation of RM1.94 billion.
(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuation)