Alam Maritim Resources Bhd - 2010

MARC has affirmed its ratings of AA-IS and MARC-1ID /AA-ID on Alam Maritim Resources Berhad’s (Alam Maritim) RM500 million Sukuk Ijarah Medium Term Notes and RM100 million Murabahah Commercial Papers/Medium Term Notes facilities, respectively. Alam Maritim’s ratings are supported by the company’s established market position in the domestic offshore support vessel (OSV) market, its stronger-than-peer profitability and cash generation ability. The ratings are moderated by concerns on lower vessel utilisation and charter rates over the past 12 months and potential provisions and/or write-offs in respect of its rising past due receivables. The outlook on the ratings is stable.

Alam Maritim is currently Malaysia’s third largest OSV operator by tonnage. The group owns 38 Malaysian-flagged vessels comprising mostly anchor handling tug supply (AHTS), utility and supply vessels. Since MARC’s December 2009 review of the rated facilities, the order momentum in the OSV market has remained sluggish, as reflected in the OSV division’s declining outstanding orderbook and lower capacity utilisation rates. Alam Maritim’s capacity utilisation rate in 2Q2010 fell to 70% from 82% in FY2009 while its outstanding order book declined noticeably to RM320.0 million from RM431.9 million in October 2009, translating into significantly lower earnings visibility as compared to the past.

The group’s underwater services, previously identified as one of the group’s growth drivers, has expanded its service offerings in line with its aspirations to become a full-fledged contractor. The earnings of the underwater division have, however, fallen significantly following the completion of its first underwater pipeline installation project in May 2010. Most of the assets of the underwater division are currently not in use, pending the scheduled end of the year delivery of a pipelay barge that will be jointly owned with Singapore’s Swiber Engineering Limited. The acquisition of the barge is expected to enhance Alam Maritim’s competitive standing as it bids for new pipeline installation projects commencing from 2011 onwards.

During the first six months of 2010 (1H2010), Alam Maritim’s consolidated operating profit and revenue fell by 11.7% and 41.1% respectively due to lower charter rates and capacity utilisation at the OSV division, in addition to lower earnings of the underwater services division. Although Alam Maritim’s consolidated profitability and interest coverage measures remain adequate in relation to its ratings, MARC  notes a weakening in its  operating profit  interest  coverage to 2.5  times from an average of 4.5 times from FY2007 to FY2009. The consolidated interest coverage ratio was also affected by increasing finance costs. MARC observed a slight increase in the group’s outstanding reported debt as at end-June 2010. Reported debt levels have remained essentially flat due to the group’s reliance on off-balance sheet debt at joint-venture entity level to fund new vessel deliveries. Adjustments for Alam Maritim’s share of off-balance sheet borrowings increases its debt to equity ratio as at June 30, 2010 to 1.6 times from 1.3 times. Both the non-adjusted and adjusted debt leverage measures have improved slightly as a result of an increase in Alam Maritim’s shareholders’ funds. The group’s ongoing reliance on off-balance sheet debt to fund its fleet expansion continues to mitigate pressure on cash flows.  

MARC observed a further deterioration in Alam Maritim’s cash conversion days since December 2009, stemming from poorer collections on its receivables. Around 34% of Alam Maritim’s outstanding trade receivables of RM121.9 million at end-2009 remained uncollected seven months later as at July 2010. The group has made provisions amounting to RM9.0 million for uncollectable receivables up to December 2009. MARC is concerned that actual credit losses on the receivables could potentially put additional pressure on operating profit and cash flow. Alam Maritim’s liquidity is supported by RM223.1 million of cash and cash equivalents as at June 30, 2010 which also provides a buffer against reduced cash flow generation, amid declining charter rates and declines in capacity utilisation, in addition to its lengthening receivables collection cycle. A more aggressive debt leverage posture than is currently exhibited in consolidated debt levels and leverage measures is not reflected in the current ratings.

The stable outlook incorporates MARC’s expectation that Alam Maritim’s earnings performance is likely to remain muted in the near-term given its reduced order book and weaker near-term order book replenishment prospects for the OSV sector. MARC believes that these operating challenges should be manageable at the existing rating levels, taking into account Alam Maritim’s available liquidity which should comfortably cover its needs over the next 12 months. Nevertheless, the ratings could be pressured by prolonged softness of the OSV market and further material weakening of Alam Maritim’s key credit measures.

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