Handal Offshore Services Sdn Bhd - 2008

MARC has affirmed its long-term rating of A on Handal Offshore Services Sdn Bhd’s (Handal) RM50 million Medium Term Notes Programme (MTN). The rating outlook is stable. The rating affirmation reflects Handal’s positive track record as a specialist provider of offshore pedestal crane services and the continuing demand for its services as indicated by its long-term contracts with domestic based oil and gas companies. Moderating the ratings, however, are the thin cash flow coverages stemming from increased working capital requirements to support its growing orderbook and its present small equity base which is reflected in its relatively high gearing.

At present, Handal is the only domestic and Petronas-licensed company to provide fabricating, integrated overhauling and maintenance services in respect of offshore pedestal cranes. It has long-term contracts with options to extend till May 2013 valued at RM272.1 million with three oil and gas companies: ExxonMobil Exploration and Production Malaysia Inc, Petronas Carigali Sdn Bhd and Talisman Malaysia Limited to provide integrated crane services. The three entities accounted for 58% of its total revenue of RM55.6 million in FY2007, implying significant customer concentration. Handal’s high growth trajectory, reflected in a 72.7% increase in its pre-tax profit to RM12.1 million in FY2007, was achieved in the context of a relatively small revenue and earnings base and increased capital spending by oil and gas companies. The company recorded higher contract value from its integrated crane services division and a RM6.58 million maiden revenue contribution from its venture into workover project lifting solutions. For the first half of 2008 (1H2008), its revenue and profit before tax stood at RM24.9 million and RM4.3 million respectively.

Handal has consistently maintained positive, albeit relatively low levels of operating cash flows to meet its debt service obligations. Its heavy working capital requirements have constrained free cash flow generation, as reflected in its negative cash and cash equivalents from FY2003 to FY2006. Its positive cash and cash equivalent in FY2007 reflected the proceeds from the MTN issuance. Handal’s receivables days increased slightly to 66.8 days in FY2007 from 66.0 days in FY2006. The general credit quality of its receivables is good given the strong credit profile of its three major customers.

As of December 31, 2007, Handal’s debt leverage ratio increased to 1.52 times upon the drawdown of Tranche 1 of the MTN, utilised mainly to finance the construction of the new ten acre fabrication and maintenance  facility  in  Kemaman, its  largest  debt  obligation  to date.  Handal’s borrowing capacity is constrained  by  its  maximum  covenanted  debt-to-equity  ratio  of 1.75  times in FY2007 under its MTN programme. MARC expects Handal’s continuous retention of earnings and the scheduled or gradual repayment of term loans to reduce Handal’s gearing ratio to a more comfortable level in FY2008. As of 10 September 2008, its sinking fund balance of RM7.6 million is sufficient to meet the first repayment of RM5.0 million due in October 2009. As part of its effort to boost its small equity base, MARC understands that Handal has received approval from the Security Commission for its Initial Public Offering, targeted to be listed on the Second Board of Bursa Malaysia in early 2009.

The stable outlook reflects MARC’s expectations that the company’s recurring earnings stream will be supported by its long term contracts and its continued ability to secure or renew contracts. Additionally, the high barriers to entry for offshore pedestal crane services in the domestic market will likely deter the entry of new competitors in the near to medium term.

Major Rating Factors

Strengths

Challenges/Risks

• High working capital requirement;
• Small equity base is expected to prevail until proposed listing, targeted in early 2009.