Scomi Group Bhd - 2010

MARC has affirmed its AA- rating on Scomi Group Bhd's (Scomi) RM500 million Medium Term Notes Programme (MTN) and revised its rating outlook to negative from stable. The outlook revision incorporates some weakening in Scomi's business and financial profile as a result of current negative industry fundamentals.

The affirmed rating, meanwhile, incorporates steps taken by Scomi to bolster its liquidity position and to strengthen its balance sheet. Scomi had raised a total of RM303.7 million from the disposal of subsidiary companies during the nine month period ended September 30, 2010 (9M2010) and paid down RM54.2 million of group borrowings. The liquidity generated from the disposals will allow the group to cushion the impact of the lower contribution from the Western Hemisphere and long gestation period for projects awarded to its transport solutions division. The debt capacity of Scomi's eventual asset base will be an important determinant of its future rating direction.

Scomi's liquidity profile has improved in spite of its negative cash flow generation for 9M2010, which MARC views as an important risk mitigating factor. As at September 30, 2010, Scomi had consolidated cash balances of RM163.4 million after netting off bank overdrafts and encumbered cash (September 30, 2009: negative RM70.1 million). Additionally, Scomi's energy logistics associated company is expected to raise RM550 million in cash from the sell-down of its stake in its Indonesia-based coal logistics and offshore businesses. It is likely that a portion of the proceeds will be available to fund holding company liquidity needs, including its debt service obligations.

Since MARC's last rating action in December 2009, the group's consolidated revenue and profitability have remained under pressure. Apart from an extended weakness in market conditions for its drilling-related oilfield and energy logistics operations, Scomi's results for 9M2010 was also impacted by third quarter provisions totalling RM162.3 million, mostly non-recurring in nature and relating to provisions for potential impairment and costs at its associated company.

Scomi's oilfield services division posted a segment profit of RM2.8 million for 9M2010, (RM91.9 million for the preceding year corresponding period). Its transport solutions division's segment profit of RM21.9 million, meanwhile, was slightly more than a third of 9M2009's RM61.7 million segment profit. Scomi reported a pre-tax loss of RM139.7 million for 9M2010 compared to a pre-tax profit of RM99.3 million for 9M2009.  MARC notes that Scomi’s orderbook replenishment for its oilfield services division and transport solutions division has improved in 2H2010, which could improve its earnings prospects in the coming quarters. 

While historical net cash flow from operations (CFO) generation has been positive, Scomi posted negative CFO of RM151.1 million in 9M2010 due to significant increases in working capital requirements. MARC considers the group's debt service burden as high relative to its current earnings and cash flow generation; interest paid on borrowings was RM58.8 million for the nine-month period. The group's debt-to-equity ratio rose to 1.26 times as at end-September due to the impact of recent losses on its equity base.

The negative outlook could be revised to stable if pressure on Scomi's consolidated credit profile alleviates as a result of improved business conditions or balance sheet restructuring.

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