MISC Bhd - 2013

MARC has affirmed its AAAID rating on MISC Berhad's (MISC) RM2.5 billion Islamic Medium Term Notes (IMTN) programme. The outlook on the rating is maintained at stable. The rating action incorporates the group’s leading position in the LNG shipping segment derived largely from its long-term contracts with its parent company Petroliam Nasional Berhad (PETRONAS) as well as MISC’s moderate financial management policies and strong financial flexibility due in part to its majority ownership by the national oil company. MARC continues to consider MISC as a strategically important subsidiary of PETRONAS, on which the rating agency maintains a senior unsecured rating of AAA/Stable based on public information. Accordingly, the affirmed rating incorporates rating uplift from MISC’s standalone credit profile due to very high parental support from PETRONAS. The support has been well demonstrated through, among other measures, the recent full subscription of rights issues in MISC and the extension of bridging loans to the company.

Operating a fleet of 128 vessels, of which 74% of the vessels are owned by the group, MISC is currently among the top five largest shipping conglomerates in the world by market capitalisation at RM25.4 billion as at end-December 2013 (FY2013). The group provides fully integrated maritime, offshore floating solutions, heavy engineering and logistics services; however, the largest contributors to consolidated revenue are the liquefied natural gas (LNG) and petroleum shipping segments, followed by the heavy engineering segment. While MISC’s diversified vessel fleet provides some degree of revenue and cash flow stability, its LNG shipping segment’s long-term contracts with PETRONAS continue to drive group earnings and offset the recent weak performances of its petroleum and chemical shipping segments. For FY2013, the LNG shipping segment provided about 30% and 61% of group revenue and pre-tax profit. MISC's operating relationship with PETRONAS as a major provider of its LNG shipping requirements has provided considerable competitive advantages to the company.

Notwithstanding the aforementioned factors, MARC views that PETRONAS’ decision to acquire its own LNG vessels directly will weigh on MISC’s LNG business growth. While MISC is engaged as project manager and technical consultant for the construction of the LNG newbuilds for PETRONAS, the company would need to develop its LNG business outside the PETRONAS group. Meanwhile, the long-term nature of its LNG contracts with PETRONAS will mitigate any impact on MISC’s medium-term earnings.

MARC also notes that as PETRONAS seeks to complement its LNG transportation requirements by building its own LNG shipping capability, MISC will not have to allocate sizeable capital resources for LNG vessel construction.

The group’s petroleum and chemical shipping segments are expected to continue to face challenging conditions due to weak freight rates. Any improvement in the near term may be supported by a moderation in vessel delivery which is expected to peak in 2013/2014. MARC views positively the group’s efforts to rationalise the petroleum and chemical shipping segments’ fleet by disposing older vessels, which should reduce vessel operating costs and reduce the losses incurred by the segments. As at end-December 2013, the number of vessels in the petroleum and chemical shipping segments declined to 75 and 24 from 79 and 29 respectively in the previous year.

During FY2013, revenue declined marginally by 0.9% to RM8.97 billion (FY2012: RM9.05 billion) despite the commencement of the operations of the LNG shipping business’ two new floating storage units (FSU) and some improvement in freight rates in the chemical shipping segment. The decline is attributable to the reduced vessel fleet size following the rationalisation exercise and lower contribution of projects in the heavy engineering segment. The group’s pre-tax profit was higher at RM2,227.7 million (FY2012: RM1,516.7 million) attributed to lower operating cost and general and administrative expenses, higher share of profit from joint ventures following the lease commencement of the Gumusut-Kakap FPS and lower net vessel impairments.

MARC expects MISC’s overall capital expenditure to moderate in line with group’s fleet rationalisation programme, and fewer acquisitions of new vessels amid a still challenging petroleum and chemical shipping environment. Most of the capital expenditure is expected to be incurred for its yard optimisation programme in the heavy engineering segment. During FY2013, the group registered positive free cash flow due to lower capital expenditure in line with the group strategy of downsizing its fleet. As at end-December 2013, the group has a total capital commitment of RM3.5 billion, of which RM1.0 billion has been approved and contracted. MARC views the group’s gearing level as moderate with a debt-to-equity ratio of 0.40x; any potential increase in leverage level would mainly arise from a yard optimisation programme being undertaken by its subsidiary Malaysian Marine and Heavy Engineering Holdings Berhad (MHB).

MISC's affirmed rating also reflects its manageable debt maturities and comfortable liquidity position. As of end-December 2013, 33% of its total borrowings or RM3.39 billion is due in 2014. In addition to strong liquidity with cash balance of RM4.7 billion, MISC also has the flexibility to refinance its upcoming repayment given its current lower leverage position and its access to the debt and capital market.

The stable rating outlook on MISC reflects MARC’s expectation of continued support from PETRONAS over the next 12 to 18 months. However, any accelerated development of PETRONAS’ LNG shipping capabilities to an extent that could potentially weaken MISC’s existing relationship with its parent may prompt a reassessment of MISC’s strategic importance to its parent.

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