CREDIT ANALYSIS REPORT

MISC BERHAD - 2016

Report ID 5439 Popularity 1326 views 9 downloads 
Report Date Mar 2017 Product  
Company / Issuer MISC Bhd Sector Trading/Services - Transportation
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its AAAIS rating on MISC Berhad's (MISC) RM2.5 billion Islamic Medium-Term Notes (IMTN) programme. The outlook on the rating is stable.

The affirmed rating reflects a three-notch rating uplift from its standalone rating based on MARC’s assessment of significant operational and financial integration with parent Petroliam Nasional Berhad (PETRONAS) on which the rating agency maintains a AAA/stable rating. MISC’s role as a key provider of shipping services to PETRONAS’ liquefied natural gas (LNG) underscores the relationship between parent and subsidiary. MISC’s standalone credit profile is well-supported by the stable revenue stream generated from sizeable long-term LNG and offshore contracts as well as its strong liquidity and low leverage position. Its fleet size of 123 vessels and 14 offshore floating facilities as at end-December 2016, has enabled MISC to maintain a key position in the LNG and petroleum shipping services as well as offshore floating solutions segments. Notwithstanding these strengths, MISC’s business profile remains susceptible to the vagaries of the oil and gas sector.

In 2016, MISC merged its chemicals segment with the petroleum business segment and divested its logistic arm to further streamline its business portfolio. This also included acquiring the remaining 50%-equity interest in Gumusut-Kakap Semi-Floating Production System (L) Ltd’s (GKL) from a related company for about RM1.9 billion (US$445 million). Following the acquisition, GKL is expected to contribute an additional RM200 million per year to the group’s earnings. MISC also took delivery of two LNG vessels, Seri Camelia in September 2016 and Seri Cenderawasih in January 2017 and is expected to take delivery of three more vessels, one in 2H2017 and two in 2018. MARC understands that these vessels have secured long term-contracts.

MISC’s business growth over the next five years will continue to be driven by the group’s core business segments, namely LNG, petroleum business and offshore. For 2016, revenue from LNG shipping fell by 11.5% to RM2,481.6 million due to a smaller operating fleet size and lower charter rates on new contracts which are expected to remain soft amid a global oversupply of LNG vessels. MARC expects some pressure on financial performance over the near term as new LNG deliveries will be chartered at prevailing charter rates. The revenue from the group’s petroleum business segment has remained flat at RM4,754.9 million, due in part to the stronger US dollar against Malaysian ringgit. MISC’s offshore segment, however, has remained steady supported by long-term fixed charter rates with an average contract tenure of 11 years. For 2016, revenue from this segment increased by 6.4% to RM1,159.6 million supported by the consolidation of GKL’s revenue since May 2016.

On a consolidated basis, MISC registered revenue decline of 12.0% y-o-y to RM9.6 billion in 2016. In addition to smaller fleet of vessels and softer charter rates, its performance was affected by fewer and lower value of projects in progress in its heavy engineering business segment, which is undertaken by subsidiary Malaysia Marine and Heavy Engineering Holdings Berhad (MHB). MISC’s pre-tax profit rose by 9.6% y-o-y to RM2.8 billion, largely due to RM365.0 million in compensation received on early termination of two LNG vessels, RM250.8 million on reversal of provision for a legal suit and RM847.3 million in net gain on acquisition of GKL. Excluding these one-off items, MISC’s pre-tax profit would be 14.3% y-o-y lower at RM2.2 billion. Its performance has also been affected by continued losses incurred by MHB, which faces challenges in replenishing its order book. MHB registered a pre-tax loss of RM134.6 million in 2016 due to impairment charges recorded during the year.

MISC group’s consolidated cash flow from operations (CFO) and free cash flow (FCF) stood at a healthy RM5.2 billion and RM1.4 billion as at end-2016 respectively (end-2015: RM3.4 billion; RM307.0 million). Going forward, FCF would be supported by the group’s lower capex projections for the next five years. Although its leverage position rose to 0.32 times from 0.18 times as at end-2015 upon consolidation of GKL’s total borrowings of RM4.6 billion, its debt-to-equity level remains well within its standalone rating threshold. MISC maintains a strong liquidity position with cash equivalents of about RM6.6 billion.

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, its standalone ratings could be affected by weakening in its credit profile.

Major Rating Factors

Strengths

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

Challenges/ Risks

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