MISC Bhd - 2008

MARC has affirmed its AAAID and MARC-1ID / AAAID ratings on MISC Berhad’s (MISC) RM2.5 billion Islamic Medium Term Notes Programme (IMTN) and RM1.0 billion Murabahah Commercial Papers/ Medium Term Notes Programme (CP/MTN) respectively. The ratings carry a stable outlook. The affirmation reflects MISC’s dominant market position in the energy transportation segment, particularly for the shipment of liquefied natural gas (LNG), strong support of its major shareholder, Petroliam Nasional Berhad (Petronas), and solid financial profile characterised by solid earnings, low debt levels, excellent cash flow generating ability and exceptional financial flexibility.

With a diversified fleet of 108 owned vessels and seven offshore floating facilities, MISC is the dominant shipping and logistics services provider in Malaysia focusing on transportation of energy-related products such as LNG, petroleum and chemicals. MISC derives stable earnings through its long-term charter contracts, with an average tenure of more than 10 years, undertaken by its LNG and offshore business units. These contracts contributed approximately 60% of its consolidated earnings in FY2008. In addition to being the principal transporter of LNG for Petronas and the leading provider of lightering services in the US Gulf of Mexico through wholly-owned subsidiary, AET Tanker Holdings Sdn. Bhd., MISC is strengthening its position in the offshore and heavy engineering markets. MISC’s growth trajectory is underpinned by the continuous expansion of its LNG, petroleum, chemical and offshore businesses and the strengthening of its competitive position in the heavy engineering unit.

Consolidated revenue grew by 15.7% to RM13.0 billion in FY2008 on the back of higher container liftings and higher contribution from its offshore and heavy engineering segment. Operating profit margin in FY2008 however, moderated to 22.2% or RM2.9 billion (FY2007: 29.0%, RM3.3 billion) attributed to lower freight rates in its key energy-related shipping divisions coupled with higher overall operating costs. For the nine months ended December 31, 2008 (3QFY2009), pre-tax profit was down 22.1% to RM1.37 billion compared to the previous year corresponding period, on account of losses in its liner business as well as higher operational costs, to which the group has responded by implementing a number of cost containment measures. The more subdued earnings outlook for its petroleum shipping and liner businesses is expected to translate into lower earnings for FY2009 relative to FY2008.

MISC’s strong cash generating ability is reflected by its net cash flow from operations after tax (CFO) of RM4.0 billion in FY2008 and strong CFO interest coverage ratio of 12.0 times (x). Debt servicing ability as measured by the debt service cover ratio (DSCR) remains strong at 6.8x despite its considerable growth-related capex. For 3QFY2009, MISC generated CFO of RM3.3 billion. MARC expects MISC’s cash flow protection measures to remain adequate for its ratings, supported by stable earnings from its long-term charters, increasing operating cash flows from its heavy engineering unit and a prudent financial management. MISC retains very strong financial flexibility on account of its favourable access to domestic and international capital markets and of its links to Petronas which has a 62.4% stake in the company. Its liquidity position was strong, evidenced by its cash balance of RM4.1 billion as of end-December 2008.

Despite the unrealised translation losses taken up in its currency translation reserves arising from weaker US$ relative to RM in FY2008, which would foreseeably reverse given the recent US$/RM exchange rate movements, MISC’s debt-to-equity ratio (excluding minority interest) of 0.41x in FY2008 (FY2007: 0.37x) compares favourably with other AAA MARC-rated issuers.

The stable outlook on the ratings reflects MARC’s expectation that the group would demonstrate earnings resilience through the shipping cycle while maintaining credit metrics that are consistent with its ratings.

Major Rating Factors

          Strengths

•  Strategic benefit accruing to MISC as a subsidiary of Petronas;
• Leading position in its main business segments – energy-related shipping, integrated liner logistics offshore business and, marine and heavy engineering business;
• Stable and predictable earnings and cash flow generation of its LNG shipping and offshore business divisions;
• Resilient earnings from its LNG shipping and offshore business unit segments; and
• Low debt level, good cash flow generating ability and exceptional financial flexibility.

          Challenges/Risks