MISC Bhd - 2009

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 stable outlook on the ratings has been maintained. The affirmed ratings reflect MISC’s strong position and long track record in the energy transportation segment, its demonstrated ability to align its business portfolio in accordance with strategic growth areas and the relatively predictable earnings and cash flow stream provided by its liquefied natural gas (LNG) shipping and offshore business segments. The ratings also reflect MISC’s moderate debt burden and sound debt management practices as well as its ownership and continued support from its parent, Petroliam Nasional Berhad (Petronas). However, MARC also notes that MISC continues to face a difficult operating environment which has visibly impacted its profitability and reduced the headroom within current ratings to accommodate further deterioration in its financial metrics. Nonetheless, MARC believes that MISC’s announced RM5.2 billion capital raising exercise would alleviate near-term concerns as to the significant amount of downward pressure on MISC’s credit measures that will be exerted by its large committed capital spending under difficult industry conditions.

MISC is an integrated maritime, heavy engineering and logistic services provider with global market positions in the LNG and petroleum shipping segments of the shipping industry. As of September 2009, 59% from its 164-strong fleet was accounted for by LNG carriers and petroleum tankers. The shipping segments in which MISC operates have differing risk profiles with varying sensitivity to economic cycles, with the LNG segment possessing better operating fundamentals than the liner shipping segment. For financial year ended March 31, 2009 (FY2009), the group recorded an operating profit of RM1.9 billion in spite of losses in the integrated liner logistics’ segment of RM847.6 million, albeit down from RM2.8 billion in FY2008. MISC’s base of long-term charters and contracts of affreightment (COA) for its LNG and petroleum shipping segments reduce the risk of low vessel utilisation and contribute to income stability. Additionally, the increasing contribution from MISC’s non-shipping operations is also expected to support the stability of its earnings profile.

Apart from being the sole transporter of LNG for Petronas, which is the third largest LNG producer in the world, MISC has also been successful in broadening its LNG shipping client base to include third party charterers. Meanwhile, MISC continues to pursue new revenue-generating opportunities such as the offshore floating solutions business, tank terminal operations and the expansion of its heavy engineering fabrication yard. Additionally, MISC intends to turn around its loss-making liner operations and is rationalising its container fleet to focus on intra-Asia and Asia-Middle East trade. MARC believes that these initiatives, along with MISC’s emphasis on cost containment, will help temper weak industry conditions and should improve its business and financial risk profile over the long run.

In line with many other shipping entities, MISC reported a weaker earnings performance in FY2009 and an even sharper decline in pre-tax profit for the three months ended September 30, 2009 (Q2FY2010). Consolidated revenue was 20.8% lower than the preceding year’s corresponding quarter while profit before tax excluding loss on disposal of ships was 63.8% lower. Consolidated pre-tax profit excluding loss on disposal of ships was 36.0% lower than the RM282.0 million recorded in the first quarter of FY2010. The lower profit is attributed to reduced profit from its petroleum shipping business and higher losses incurred by its chemical shipping business and continued, albeit reduced losses of its liner business. MARC expects earnings to remain under pressure from falling rates in petroleum, chemical and container shipping, and foresees higher potential for volatility of its performance amid a shaky global economic recovery.

Petronas’ commitment to support MISC is a key credit strength and is demonstrated by Petronas’ undertaking to subscribe and/or procure subscription for its entitlement in full under MISC’s announced rights issue as well as to apply for excess shares not subscribed by other shareholders. Proceeds from the rights issue will be used almost entirely to fund MISC’s capital expenditure. Considering the significant weakening of MISC’s financial performance for the first six months of FY2010, MARC believes the planned capital exercise is necessary to help MISC conserve cash and liquidity and to prevent further weakening in MISC’s credit metrics. On a pro-forma basis as at March 31, 2009, MISC’s total borrowings to shareholders’ fund will decrease to 0.45 times from 0.56 times. The proposed rights issue exercise is expected to be completed within the first three months of 2010. Meanwhile, financial flexibility remains excellent, with MISC’s ready access to debt funding, and support from a very strong parent.

The stable outlook on the ratings incorporates expectations of weaker results in the near term in line with difficult trading conditions. The rating outlook also reflects the downside protection provided by the group’s current long-term charter base while recognising the implications of a protracted period of earnings weakness on profitability and cashflow coverage ratios which have already declined from historical levels.

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