Alam Maritim Resources Bhd - 2011

MARC has revised the outlook to negative from stable and affirmed its ratings at AA-IS and MARC-1ID /AA-ID on Alam Maritim Resources Berhad's (Alam Maritim) RM500 million Sukuk Ijarah Medium Term Notes (Sukuk Ijarah MTN) and RM100 million Murabahah Commercial Papers/Murabahah Medium Term Notes (MCP/MMTN) programmes respectively. The rating action affects RM475 million of outstanding notes issued under the rated programmes.

The revised outlook reflects the pressure on Alam Maritim's credit profile arising from significantly weaker earnings and cash flow generation in 2010 and 2011. Alam Maritim’s earnings had been pressured by lower vessel utilisation and charter rates, reflecting strong competition and a difficult operating environment. While MARC acknowledges the improvement in Alam Maritim’s operating environment since the second quarter of 2011 (2QFY2011), the rating agency believes that the group’s financial measures will remain weak for the current ratings in the next 12 to 18 months. The negative outlook also reflects the limited headroom within Alam Maritim’s consolidated financial metrics and current ratings to absorb any further adverse operating developments. Without a sustained recovery in market conditions, Alam Maritim will likely face substantial challenges in maintaining adequate credit metrics for its current ratings. The affirmed ratings continue to acknowledge Alam Maritim's established and leading position in the domestic offshore support vessel (OSV) market, and its liquidity position which remains adequate vis-à-vis its debt maturity profile.

Alam Maritim is the third largest domestic OSV operator by tonnage; it owns 41 Malaysian-flagged vessels comprising mostly anchor handling tug supply (AHTS), utility and supply vessels. It expects to take delivery of another two AHTS vessels with the latest dynamic positioning system this year, which should benefit its domestic competitiveness. While the OSV charter business remains its core earnings generator, its other key businesses include underwater services and offshore related installation and construction activities.

The recovery in market conditions, particularly beginning from 2QFY2011, has resulted in a resumption in new contract flows with new orders secured in FY2011 totalling RM496.4 million, thereby bringing the group's order book to RM580.0 million as at end-September 30, 2011. MARC notes that the earnings contribution from the non-OSV businesses remains modest. Since completing its first pipeline installation project  in  May  2010, the underwater  segment only  secured  new contracts  in June 2011 and January 2012 totalling RM167.0 million related to the Sabah Oil and  Gas Terminal (SOGT) project for the fabrication, construction and commission of mooring buoy, pipelines and other related works. MARC opines that the group’s strategic tie-up and collaboration with the state-controlled Yayasan Sabah Group and the reported RM28.3 billion Petronas spending for oil and gas related projects in the state of Sabah augurs well for the group’s non-OSV businesses.

The group posted a pre-tax loss of RM17.96 million for the 12 months ended December 31, 2010 (FY2010). Alam Maritim posted a fourth quarter loss of RM73.5 million in 4QFY2010, followed by a consecutive quarterly loss of RM6.7 million in 1QFY2011. Vessel utilisation fell to a low of 65% from the norm of around 85% in previous years during the period from 4QFY2010 through 1QFY2011. The group had failed to secure any new and/or renewal charter hire contracts in 4QFY2010. An improvement in business conditions beginning 2QFY2011 helped the group return to profitability for the twelve-month period ended December 31, 2011 (FY2011) with a pre-tax profit of RM13.3 million (FY2010: pre-tax loss of RM17.96 million) on revenue of RM308.1 million (FY2010: RM242.2 million). Cash flow from operations (CFO) also turned positive, to a modest RM23.8 million compared to a CFO deficit of RM40.4 million in FY2010. Nonetheless, cash and bank balances have declined markedly to RM139.8 million (end-FY2009: RM193.0 million; end-FY2010: RM178.6 million). Alam Maritim’s gearing as measured by debt-to-equity ratio improved to 1.24 times (x) as at end-FY2011 compared to 1.42x as at end-FY2010; however, MARC notes that the improvement in gearing was partially aided by the off-balance sheet financing of new vessel acquisitions through associate companies and joint venture entities. Alam Maritim’s adjusted debt-to-equity ratio after accounting for its proportionate share of debts would have been 1.72x as at FY2011. The off-balance sheet financing of new vessels has allowed the group to show reduced balance sheet leverage; MARC notes with concern the group’s continuing high adjusted leverage ratio in the context of the improving, but not fully recovered operating environment. The rating agency also notes that reported revenue and profitability in recent periods has been supported mainly by earnings contributions from non-consolidated entities.

The rating outlook could revert to stable if Alam Maritim’s operating performance improves over the coming quarters and the group continues to demonstrate sufficient cash flow generating capability and liquidity to meet its notes obligations, failing which the ratings would come under downward rating pressure.

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