MARC has assigned a final rating of AA-IS with a stable outlook on Malaysia Marine and Heavy Engineering Holdings Berhad’s (MHB or the group) Sukuk Murabahah Programme of up to RM1.0 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 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 Berhad which in turn has a 66.5% interest in MHB.

Since MARC’s initial assessment in February 2014, 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 (end-2013: RM2.6 billion)   provides earnings visibility until 1Q2016. MARC views the group’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 4Q2014. 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 RM54.0 billion in 2015, from an earlier forecast of RM60.0 billion. MHB’s strong domestic position in fabrication would underpin its ability to compete under PETRONAS’ policy of awarding contracts on a competitive basis.

MHB’s major strength is derived from its position as the largest domestic offshore oil and gas fabricator, with an annual offshore construction capacity of 129,700 MT and maximum load-out capacity of 55,000 MT at its fabrication yards in Pasir Gudang, Johor. Its offshore construction capability is strengthened by its long-term strategic joint venture with French entity Technip SA (Technip), a major oil and gas company with expertise and capacity to design and construct subsea structures, offshore platforms and onshore mega-complexes. MARC notes that these strengths have enabled MHB to undertake the construction of large deepwater oil and gas production facilities such as the Gumusut-Kakap semi-floating production system, the largest floating production system in Asia Pacific. MHB is currently undertaking the Malikai TLP and SK316 projects for Sabah Shell Petroleum Company Ltd and PETRONAS Carigali respectively; these projects account for about 63% of the total order book and are expected to be completed by end-2015 and 1Q2016 respectively.

For unaudited financial year ended December 31, 2014 (FY2014), MHB’s offshore business unit, which is mainly involved in the construction of offshore production platforms, contributed about 91% or RM2,447.7 million of total consolidated revenue and 36% or RM44.3 million of total consolidated operating income (FY2013: RM2,599.9 million; RM104.9 million). The remainder was contributed by the marine business unit which mainly undertakes vessel repairs and conversion into floating structures. Overall operating profits registered a sharp 37.5% year-on-year decrease to RM122.6 million (FY2013: RM196.3 million) as jobs in progress declined. MHB has continued to face margin compression in fabrication works arising from intense competition for offshore construction projects with the overall operating profit margin declining to 4.5% (FY2013: 6.8%; FY2012: 7.3%). Nonetheless, the relatively low fixed costs of about 10% of total operating costs and higher margins attributed to the energy vessel repairs segment as well as ongoing cost-cutting measures are expected to partly offset the impact of revenue decline. In June 2014, MHB undertook a mutual separation scheme involving more than 100 staff members, costing RM10.0 million in compensation.

Cash flow from operations (CFO) reverted to positive RM245.6 million in FY2014, mainly on the release of working capital following project completions during the year. MHB’s free cash flow (FCF) improved to RM67.5 million (FY2013: negative RM425.0 million) due in part to reduced dividend payments (FY2014: RM80.0 million; FY2013: RM160.0 million). MARC notes that the group’s major capex programme remains the yard optimisation programme, which commenced in 2006, for which MHB has spent RM1.1 billion of the budgeted RM2.5 billion. MARC notes that 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 RM233.0 million for FY2015. Nonetheless, MARC understands that the group could defer its capex spending in light of the challenging environment. 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.

The stable outlook incorporates MARC’s expectations that MHB will maintain a credit profile that is commensurate with the current rating band. 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. In addition, MARC will continue to assess the strength of parental support which may have implications on the rating. 

Contacts:
Oo Chin Kai +603-2082 2260/ chinkai@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.