MISC Bhd - 2010

MARC has affirmed its AAAID and MARC-1ID /AAAID ratings on MISC Berhad’s (MISC) RM2.5 billion Islamic Medium Term Notes (IMTN) Programme and RM1.0 billion Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme with a stable outlook. The affirmed ratings reflect MISC’s established position and long track record in the energy transportation segment, the close strategic alignment of its business with that of its parent, Petroliam Nasional Berhad (Petronas), and the relatively predictable earnings and cash flow stream provided by its liquefied natural gas (LNG) shipping and offshore business segments. The rating also incorporates MISC’s strong liquidity position, moderate debt burden and sound debt management practices. These strengths are tempered by MISC’s recent limited free cash flow, mostly due to growth-related capital spending and the lacklustre performance of the shipping industry in general.

MISC is the third largest shipping conglomerate in the world by market capitalisation, and is an integrated maritime, offshore floating solutions, heavy engineering and logistic services provider with established positions in the LNG and petroleum segments of the shipping industry. As at June 30, 2010, the group owns 113 vessels and operates a fleet of 164 vessels and 11 offshore floating facilities, six of which are jointly owned. The group has more than four decades of experience in the shipping industry, and has built a track record for reliability and on-time cargo delivery. The group is organised into three main divisions: energy related shipping, other energy businesses and integrated liner logistics, which accounted for 48.1%, 31.4% and 20.5% of the group’s consolidated revenue respectively in the financial year ended March 31, 2010 (FY2010).

MISC is 62.7% owned by Petronas, making it the preferred LNG shipping provider of its parent. At the same time, the group’s other energy businesses have also complemented the national oil company’s expansion into deepwater exploration and production activities as well as geographical footprint. However, most of MISC’s shipping operations, with the notable exceptions of its liquefied natural gas (LNG) transportation division, are cyclical in nature and continue to exhibit volatility in profitability and asset values in tandem with shipping cycles. The group’s profitability has been trending downwards in recent years due to the general decline in freight rates and excess tonnage capacity across almost all shipping segments.

In FY2010, MISC’s revenue fell by 12.7% to RM13.8 billion (FY2009: RM15.8 billion) and the group recorded a 41.4% decline in profit before tax to RM911.9 million (FY2009: RM1.6 billion) due to lower contribution from its energy shipping divisions and the widening losses reported by its integrated liner logistics division. The petroleum tanker segment recorded significantly lower revenue and profitability during the year due to lower time charter hire rates observed in the tanker market. Tanker rates are expected to remain weak in the short- to medium-term due to excess capacity. The tanker segment continues to see a net increase in tonnage due to existing order book at shipyards. However, the increase in tonnage could be mitigated by higher scrapping activity ahead of the International Maritime Organization’s (IMO) deadline for trading of single-hull vessels by end-2010.

The group’s earnings improved in 1QFY2011 due to lower losses from its liner shipping operations and increased profitability of its heavy engineering business. MISC’s restructured liner business benefited from higher laden lifting, improved intra-Asia box rates and lower charter hire expenses and slot exchange costs as a result of its withdrawal from the Grand Alliance. MARC opines that MISC is better positioned than many of its peers to weather the current shipping downturn owing to the sustained earnings performance of its LNG shipping and offshore floating solutions and engineering and construction segments, which provides a buffer against freight and charter rate volatility and low capacity utilisation in the other shipping segments.

MISC completed its rights issue in February 2010 which raised its cash and cash equivalents to RM7.8 billion as at March 31, 2010 (March 2009: RM3.7 billion), providing it with the capacity to make opportunistic investments even in the context of a more challenging operating environment, should the opportunity arise. MISC’s contracted capital expenditure as at June 30, 2010 remained high at RM6.1 billion, excluding projected expenditure on four more very large crude carrier (VLCC) tankers costing an estimated RM1.4 billion. MARC expects near-term free cash flow to remain constrained by MISC’s heavy ongoing capital spending. The rating agency believes that improvement in MISC’s debt measures will essentially be dependent upon earnings growth and a disciplined approach to acquisitions. As at end-March 2010, MISC’s debt leverage as measured by its debt-to-equity ratio remained moderate at 0.53 times (March 2009: 0.56 times). MARC continues to draw comfort from the group’s proactive management of its debt profile and its commitment to maintain debt leverage at a level that is consistent with its AAA rating level.

The stable outlook anticipates that MISC’s financial measures will remain adequate for its rating level. A weaker-than-expected operational performance or large debt-financed expansions will, however, put pressure on MISC’s credit profile. 

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Challenges/Risks