MISC BERHAD - 2015

MARC has affirmed its AAA_ID rating on MISC Berhad's RM2.5 billion Islamic Medium-Term Notes (IMTN) programme. The outlook on the rating is stable. The rating incorporates a three-notch rating uplift from MISC’s standalone rating based on MARC’s assessment of very strong parental support from Petroliam Nasional Berhad (PETRONAS) which carries a AAA/stable rating from the rating agency. The support is reflected in the significant operational integration between the two companies and the financial support that has been extended by the parent to the subsidiary. MISC also serves as a major liquefied natural gas (LNG) shipping service provider to PETRONAS.

MISC’s standalone rating incorporates its leading domestic market position in the LNG shipping segment, strong operational track record and improved financial performance. The rating is constrained by the vulnerability of the LNG and petroleum transportation segments to the supply-demand dynamics in the oil and gas industry and the potential increase in the group’s gearing level to fund its fleet expansion. As at end-December 2015, MISC operates a fleet of 122 vessels and 14 offshore floating facilities. Its large vessel fleet size, of which 73% is owned, underpins its position as a global shipping conglomerate providing petroleum shipping services, offshore floating solutions, heavy engineering and logistic services.

MARC notes that in light of the challenging environment for some of MISC’s business segments, the group has continued with its efforts to dispose non-core businesses and to streamline its operations. MISC recently divested its 50% interest in VTTI B.V., which owns and operates a network of oil product storage terminals and refineries in 11 countries, including Malaysia, for US$830 million. It will acquire the remaining 50% interest in Gumusut-Kakap Semi-Floating Production System (L) Ltd (GKL) from Petronas Carigali Sdn Bhd for US$445 million. MARC views that the acquisition, which will be funded internally, will provide a steady income stream to MISC through GKL’s long-term lease with major oil companies until 2034. However, GKL has total borrowings of US$1.1 billion, which upon consolidation would increase MISC’s leverage position to 0.3x from the current 0.18x.

MISC remains focused on its energy-related businesses (mainly LNG and petroleum) and plans to expand its fleet size with five new LNG vessels (newbuilds) and eight new vessels for its petroleum business between 2016 and 2018. The expansion is expected to cost US$1.4 billion and will be largely funded by borrowings. As a consequence, MISC’s leverage position which has been conservative is expected to increase to around 0.45x including the consolidation of GKL’s borrowings. However, given its strong ability to generate internal funds and its sizeable cash position, the increase in gearing level is currently not a rating concern. For 2015, MISC recorded a 17.3% y-o-y increase in consolidated revenue to RM10.9 billion due largely to improved freight rates for its petroleum tankers on higher demand attributable to stockpiling activities. Pre-tax profit increased by 6.5% y-o-y to RM2.6 billion despite higher impairments in 2015 while a notable gain on disposal of fixed assets contributed to the higher profitability in 2014.

For 2015, revenue from the group’s petroleum business increased by 27.8% y-o-y to US$1,106.0 million, offsetting the decline in revenue from other business segments, particularly LNG shipping which fell by 17.1% y-o-y to US$711.3 million. The decline was due to lower earnings days, exacerbated by the off-chartering of three LNG vessels for refurbishment. MARC expects the LNG shipping segment’s performance to come under pressure given the increasing likelihood of charter rates to trend lower, partly due to an excess supply of LNG vessels. The contracts for the three refurbished LNG vessels have been renewed at prevailing market rates. However, in view of the lower charter rates for the new contracts, a provision of RM232.3 million was made to recognise the write-down on the three LNG vessels.

The performance of MISC’s offshore segment has remained steady, underpinned by long-term fixed charter rates with an average contract tenure of 11 years. For 2015, pre-tax profit from this segment increased by 4.8% y-o-y to US$170.1 million, largely attributable to the commencement of FPSO Cendor’s operation and the higher rates for FPS Gumusut-Kakap. MISC’s heavy engineering, which is undertaken by subsidiary Malaysia Marine and Heavy Engineering Holdings Berhad (MHB), has seen a decline in its order book to RM1.1 billion as at end-2015 from RM1.6 billion as at end-2014, providing limited earnings visibility. The outlook for the heavy engineering segment remains challenging.

MISC group’s consolidated cash flow from operations (CFO) stood at a healthy RM4.1 billion as at end-2015 (2014: RM2.8 billion); however, a capital expenditure of RM3.1 billion and sizeable dividend payout have resulted in a lower free cash flow (FCF) of RM343.0 million (2014: RM1,238.4 million). MISC’s financial flexibility is deemed strong, with a significant cash balance of RM5.7 billion as at end-2015.

The stable rating outlook reflects MARC’s expectation of continued parental support from PETRONAS. Any weakening in MISC’s importance to PETRONAS would prompt a reassessment of the likelihood of parental support. Additionally, a weakening in MISC’s credit profile to an extent that it is not commensurate with its current standalone rating will put pressure on the ratings.

Major Rating Factors

Strengths

• High level of integration with its parent PETRONAS;
• Leading domestic market position in the LNG shipping segment;
• Stable cash flow from the LNG shipping segment and other energy businesses; and
• Moderate financial leverage.

Challenges/Risks

• Challenging environment for the global shipping and fabrication industries; and
• High capital requirements.