CREDIT ANALYSIS REPORT

MMC Corporation Berhad - 2015

Report ID 5105 Popularity 1820 views 49 downloads 
Report Date Oct 2015 Product  
Company / Issuer MMC Corporation Berhad Sector Trading/Services - Conglomerates
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale

MARC has assigned a rating of AA-IS with a stable outlook to MMC Corporation Berhad’s (MMC) proposed notes issuance of up to RM1.5 billion under a Sukuk Murabahah Programme (Sukuk Murabahah). The bulk of the proceeds from the proposed programme will be largely utilised to refinance MMC’s existing borrowings at the holding company level.

MMC is mainly an investment holding company whose key subsidiaries are involved in three major divisions: energy and utilities, ports and logistics, and engineering and construction. The rating considers MMC’s strong competitive position and healthy operational track record of its ports and energy concession assets as well as in engineering and construction. The rating also factors in the dividend-paying ability and track record of its key subsidiaries and associates to service the holding company’s financial obligations. Moderating the rating is the potential increase in debt at its subsidiary levels to finance ongoing capital requirements and/or to undertake investment activities.

MMC will derive the bulk of its earnings from its ports and logistics division, namely from Johor Port Berhad (Johor Port) and Pelabuhan Tanjung Pelepas Sdn Bhd (PTP), following the divestment of its 13.4% stake in Malakoff Corporation Berhad (Malakoff) to 37.6% in May 2015. PTP is a major container terminal in Malaysia with a container capacity of 10.5 million TEUs; the port has plans to undertake approximately RM500.0 million capex in the near term to further improve its handling capacity. Johor Port, which has container and conventional (liquid and bulk) cargo handling capacity of up to 1.2 million TEUs and 40.0 million MT respectively, has earmarked about RM240.0 million per year in capex over the next three years. In addition, the group has spent RM494.7 million to steadily increase its equity stake in NCB Holdings Berhad (NCB) to the current 30.1%. NCB owns and operates Northport, one of the two major ports in Port Klang; the equity increase in NCB is seen as steadily cementing MMC’s position as a major domestic port operator. MARC is of the view that the capital commitments and potential increase in leverage position of the subsidiaries could, to some extent, limit their dividend-paying capacity over the medium term.

MMC’s engineering and construction division has been a major beneficiary from the recent resurgence of large infrastructure projects in the country. As the project delivery partner together with Gamuda Berhad, MMC is entitled to its portion of up to 6% fee on the construction cost for the Klang Valley Mass Rapid Transit Line 1 and Line 2 (KVMRT 1 and 2) provided key performance indicators are met. In addition, the equal joint venture company between MMC and Gamuda is also the contractor for KVMRT 1’s RM8.3 billion tunnelling package. MARC notes that with the RM13.8 billion outstanding construction order book as at June 30, 2015, the engineering and construction division has demonstrable earnings visibility until FY2022.

MMC’s energy and utilities division through Malakoff and Gas Malaysia Berhad (Gas Malaysia) is expected to provide fairly stable dividend income to the holding company. Malakoff is the largest domestic independent power producer (IPP), with six plants accounting for a total net installed capacity of about 5,346 MW in West Malaysia as at end-1HFY2015. Nonetheless, the quantum of dividend distribution from Malakoff is subject to fulfilment of obligations under the respective IPP subsidiaries’ funding arrangements. Gas Malaysia is the sole distributor of reticulated natural gas to non-power industries and households in West Malaysia. The company has paid relatively sizeable dividends to MMC in recent periods (1HFY2015: RM32.0 million; FY2014: RM49.0 million). Its ability to sustain high dividend payouts going forward is dependent on improving its operating margins.

MARC notes that to date, the group’s subsidiaries and associates have successfully raised funding without any recourse to the holding company. Subsidiaries accounted for 60%, or RM4.3 billion, of the group’s total borrowings of RM7.1 billion at end-1HFY2015, which translates to a group debt-to-equity ratio of 0.74 times. Consolidated group revenue and EBITDA (excluding gain on disposal and fair value remeasurement from Malakoff) for 1HFY2015 registered at RM3.4 billion and RM1.4 billion respectively (1HFY2014: RM4.7 billion; RM1.6 billion), translating to an EBITDA interest cover of 2.8 times (1HFY2014: 2.6 times). The group’s earnings in 1HFY2015 (pre-tax profit, excluding Malakoff) have been weighed down by its engineering and construction division due to the completion of tunnelling works for the KVMRT Line 1 as scheduled and completion of the Electrified Double Track Project in prior year.

The holding company debt was largely incurred to fund the acquisition of Johor Port operations in 2006 and Senai Airport Terminal Services Sdn Bhd, which operates Senai Airport in Johor, in 2009. The debt was reduced to about RM2.8 billion as at end-1HFY2015 with the RM290 million proceeds from the 13.4% Malakoff divestment. At the holding company level, earnings have been supported by stable dividend income from the main operating entities, namely Malakoff, Johor Port and Gas Malaysia. With an adjusted cash flow from operations (CFO) of RM457.9 million in FY2014, holding company CFO interest coverage stood at 2.74 times. MMC expects dividend inflow to increase going forward, largely supported by additional income from its construction projects and Senai Airport City (SAC) land sales. It has to date sold approximately 600 acres of SAC land for about RM850 million. While proximity to two seaports, airport and the land connectivity infrastructure are expected to be supportive of future land sales, excess supply of industrial land in the region remains a concern. MARC has accordingly sensitised the cash flows, which reveal that CFO interest cover would range between 2.4 times and 4.4 times. This assumes holding company’s borrowings and finance cost to remain at the current level of about RM2.8 billion and RM150 million per annum.

The stable outlook incorporates MARC’s expectations that MMC would maintain its credit metrics within its current rating band. Any significant increase in its leverage position as a result of debt-funded acquisitions could result in downward rating pressure. Rating improvement would hinge on the group’s ability to strengthen its key business divisions that would translate to a stronger and sustainable financial profile.


Major Rating Factors

Strengths

  • Strong competitive position in energy, engineering and construction and port operations; and
  • Concession assets in ports and energy provides stable earnings.

Challenges/Risks

  • Strengthening financial profile.
Related