Rating action          

MARC Ratings has affirmed its AA-_IS rating on Malaysia Marine and Heavy Engineering Holdings Berhad’s (MHB) RM1.0 billion Sukuk Murabahah Programme with a stable outlook. There is no outstanding amount under the programme to date. 

The rating affirmation continues to incorporate MHB’s conservative balance sheet, solid liquidity and strong competitive position as the largest domestic offshore fabricator. A one-notch rating uplift aligns with the rating agency’s view of continued business support from Petroliam Nasional Berhad (PETRONAS) group, which MHB is a member of. The rating is moderated by volatile contract flow, particularly for its heavy engineering business, that had negatively impacted its performance in the past. MHB also faces stiff competition from regional competitors that has weighed on its efforts to secure contracts from abroad.

MARC Ratings observes that MHB’s heavy engineering order book has expanded substantially to RM7.2 billion as at end-March 2023 from an average of around RM1.8 billion per year between 2017 and 2021, during which a lengthy downcycle in the oil and gas (O&G) industry and the COVID-19 pandemic had hampered new contract wins. The rebound in contract order book is in line with the sharp increase in activity in the O&G industry amid a relatively high oil price environment. New projects valued at RM5.8 billion were secured mainly from PETRONAS Carigali Berhad and its joint ventures in the last 12 months. In addition, the group was able to secure non-PETRONAS-related domestic contracts. Collectively, these contracts will provide earnings visibility up to end-2025. The rating agency views positively MHB’s standalone credit profile should the company be able to sustain its order book over the medium term. 

For 2022, group revenue rose by 12.6% y-o-y to RM1.66 billion, supported by a rebound in the performance of both the heavy engineering and marine business segments. Pre-tax profit of RM46.7 million recorded in 2022 was mainly driven by higher marine repair activities, while losses in its heavy engineering segment significantly narrowed to RM8.7 million from a loss of RM209.1 million in 2021. Annual revenue is expected to be double that of 2022 over the next two years based on its contract order book.

For 1Q2023, MHB remained marginally profitable although it incurred higher operating costs mainly for labour and materials for its new projects. MHB will need to contend with high working capital requirements which will place pressure on its cash flow in the near term. The rating agency does not view this as a concern given MHB’s strong liquidity position. As at end-March 2023, MHB had around RM628.0 million of cash and cash equivalents, which should be sufficient to cover its financial obligations, including a planned capex of RM157.7 million in 2023 to refurbish and maintain its existing infrastructure and machinery. Cash flow from operations (CFO) is expected to improve in 2024 as the group achieves project milestones.

Capital structure remains conservative, with a low debt-to-equity (DE) ratio of 0.19x as at end-March 2023. We do not anticipate a substantial rise in borrowings going forward. The group has available unutilised banking facilities of RM400.9 million as at end-March 2023 to further support liquidity, if required. 

The stable outlook reflects MARC Ratings’ expectation that MHB will maintain its credit profile in the next 12 to 18 months, underpinned by low leverage and strong liquidity positions.

An upgrade of its standalone rating would consider MHB’s ability to sustain contract flows such that earnings generated would be able to support the funding of the group’s working capital, capex requirements and dividend payments, if any, without heavy reliance on its current liquidity. The upgrade would also consider the group maintaining a conservative balance sheet structure. 

The standalone rating could be lowered in the event that the company’s liquidity position weakens significantly and/or if MHB’s financial performance were to deteriorate sharply from expectations.