MMC CORPORATION BERHAD - 2016

MARC has affirmed its rating of AA-_IS with a stable outlook on MMC Corporation Berhad’s (MMC) RM1.5 billion Sukuk Murabahah Programme (Sukuk Murabahah). The rating affects the outstanding sukuk of RM1.3 billion issued as at November 30, 2016.

The affirmed rating is driven by MMC group’s sizeable business operations and strong competitive position in three key businesses namely port and logistics, energy and utilities, and engineering and construction. Long-term concessions and sizeable construction contracts with the government underpin MMC group’s stable financial performance. The rating is moderated mainly by the group’s increased borrowings and leverage position, largely as a result of funding ongoing capital investments for its port operations as well as strategic acquisitions.

MMC’s recent proposal to acquire a 49.0% interest in Penang Port Sdn Bhd (Penang Port) for RM200 million following its RM1.4 billion purchase of NCB Holdings Bhd in December 2015 could further increase its debt. The acquisition cost of NCB, coupled with NCB-related borrowings, had increased MMC’s consolidated debt to RM9.1 billion, pushing its debt-to-equity (DE) ratio to 0.93 times as at end 9M2016 (net DE: 0.79 times). In respect of Penang Port, should the potential acquisition be fully funded by debt, the group’s leverage ratio could potentially rise to 0.95 times (net DE: 0.81 times), indicating limited headroom for further increase without triggering downward rating pressure.

MARC also notes that upon completion of the acquisition which is expected in 1Q2017, Penang Port will add another 2.0 million TEUs and 12.5 million tonnes to the group’s existing 17.4 million TEUs and 32 million tonnes in container and cargo capacities. These additions would further strengthen MMC’s position as a significant port operator along the Straits of Malacca. However, Penang Port’s sizeable debt of RM1.2 billion would continue to weigh on its financial performance although the disposal of its loss-making ferry business prior to the acquisition would alleviate some pressure on its profitability.

MMC’s current combined port operations have shown improvement with revenue and pre-tax profit increasing by 48.5% y-o-y and 30.3% y-o-y to RM2.0 billion and RM353 million respectively in 9M2016. The improvement benefitted from the performance of NCB Holdings, which operates Northport and Southpoint in Port Klang, after undertaking streamlining exercises following its acquisition. For 9M2016, Northport (M) Bhd recorded revenue of RM501.5 million and pre-tax profit of RM101.2 million (9MFY2015: RM450.2 million; RM63.9 million). Over the intermediate term, MMC plans to invest about RM1.6 billion in capital investments in its port operations which are expected to be funded by its respective subsidiaries’ internal cash and bank borrowings. This implies that dividend flow from MMC’s port subsidiaries would remain limited except for Johor Port Bhd, which has been a consistent dividend contributor. MARC also notes the relatively high borrowing level at some of MMC’s port subsidiaries, in particular Pelabuhan Tanjung Pelepas Sdn Bhd which has borrowings of RM2.7 billion.

MMC’s engineering and construction division has benefitted from the increase in large domestic infrastructure projects. Its order book, which doubled to RM20.3 billion as at end-September 2016 (end-June 2015: RM10.1 billion), provides strong earnings visibility for the division through 2022. Among key infrastructure projects, which are largely undertaken jointly with other major construction players, is the underground works package of RM15.5 billion for the Klang Valley Mass Rapid Transit-Line 2 (KVMRT-Line 2) project. Its joint-venture companies have also been appointed the project delivery partner (PDP) for the KVMRT-Line 2 and the RM12.8 billion phase 1 of the Pan-Borneo Highway project.

The group’s energy and utilities division comprises key associates, Malakoff Corporation Berhad (Malakoff) and Gas Malaysia Berhad (Gas Malaysia). Malakoff’s recent profitability has been affected by high maintenance costs and depreciation charges, leading to a decline in pre-tax profit to RM441.8 million for 9M2016 (9M2015: RM532.1 million). Gas Malaysia’s pre-tax profit increased to RM145.0 million in 9M2016 (9M2015: RM126.0 million) on the back of higher natural gas tariffs and higher sales volume. Both Malakoff and Gas Malaysia have been major dividend providers, accounting for 40.4% of MMC’s total dividend income in 2015.

At the holding company level, MMC’s revenue comprising dividend income and construction revenue is expected to be supported by the construction projects secured during the year and sale of land parcels at Senai Airport City. Dividends increased by 14.1% to RM472.8 million in 2015, partly offsetting the decline in construction revenue as a key project is reaching its tail-end. As at end-2015, holding company debt stood at RM3.0 billion (2014: RM3.2 billion), translating to a leverage ratio of 0.52 times. The bulk of the borrowings stemmed from the RM1.2 billion sukuk issued under the rated sukuk programme.

For 9M2016, MMC’s consolidated earnings increased more than two fold, registering pre-tax profit of RM367.8 million compared to the prior year’s corresponding period (excluding Malakoff’s pre-listing contributions). This was mainly due to the consolidation of NCB Holdings’ contribution and higher work progress recorded from its construction projects. The group has a moderate liquidity position with unencumbered cash balance of about RM1.4 billion as at end-9M2016, in addition to approximately RM2.0 billion in unutilised credit lines.

The stable outlook factors in the dividend-paying ability of its key subsidiaries and associates, and the group’s moderate liquidity position to service its financial obligations. Any significant increase in its leverage position and weakening in its interest cover measures could result in downward rating pressure.

Major Rating Factors

Strengths

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

Challenges/Risks

• Increasing debt from acquisition; and
• High capital investment for ports operations.