Scomi Group Bhd - 2007

MARC has reaffirmed the long-term rating of AA- on Scomi Group Bhd’s (“Scomi”) RM500.0 million Medium Term Notes Programme (“MTN”). The rating outlook is stable. The rating reflects the consolidated credit profile of Scomi, which is primarily driven by its oilfield services operations. The latter is core to Scomi’s debt servicing capacity, representing about 73.5% of Group revenues and about 69.5% of Group’s pre-tax profits. The ratings consider Scomi’s strong market position and sustained favourable conditions in its core markets for oilfield services. Scomi’s improving financial profile, moderate financial policy and good financial flexibility continues to underpin its credit strength.

Scomi is one of the world’s leading providers of drilling fluids (“DF”) and drilling waste management (“DWM”) services. The DWM, acquired in 2004, and Scomi’s DF business make up its oilfield services division, the Group’s largest revenue contributor. In FY2006, Scomi’s revenue surged by more than 47.7% to RM1.6 billion on account of growing value of contracts from its oilfield services division and strong demand for its machine shop services business. Growth will be sustained by increasing drilling activities, heightened environmental concerns and stricter government policies particularly on waste discharge worldwide, coupled with capacity additions at its machine shops.

Consolidated operating profit margins at Scomi Group level have been held up by gains relating to asset disposals to streamline its businesses. Excluding the sale proceeds of its engineering unit in FY2005, its operating profit margins would have been single digit. A slight improvement to 10.5% was observed in FY2006 although the Group is still servicing some contracts, for margins have been eroded by an inability to pass through the higher cost of raw materials (base oil) to end customers. Notwithstanding, management has indicated that future contracts have incorporated higher raw material prices which will be passed on to its clients but this is likely to be gradual as the bulk of contracts will expire in 2009. Operating margins for 3Q2007 exhibited stability at 11.8%, after excluding gains from the sale of a 19.9% stake in Scomi Oilfield Limited (“SOL”). Foreign currency risk is mitigated by the Group’s policy to match its USD revenues with borrowings in the same currency, creating a natural hedge.

The adjusted debt to equity level based on Trustee’s confirmation was at 1.74 times after netting off cash balances from total debt, within the covenant of 2.0 times in FY2006. Debt to equity net of cash balances was 1.45 times at SOL, in compliance with the terms of the RM630.0 million Murabahah Medium Term Notes issuance (“MMTN”). The MMTN was issued by KMCOB Capital Berhad, a special purpose vehicle and wholly-owned subsidiary of SOL.

Scomi generated higher net cash flow from operations in FY2006 of RM54.9 million compared to RM40.6 million in FY2005. Financial flexibility of the Group is good, supported by available unused credit facilities, cash and bank balances as well as access to the capital market.

Major Rating Factors

Strengths

• Strong global market position in the drilling fluids and drilling waste management business;
• Broad portfolio of services and geographic diversity; and
• Good financial flexibility.

Challenges/Risks:

• Modest cash flow protection measures; and
• Cyclical oil and gas industry and competitive industry conditions.