MMC CORPORATION BERHAD - 2018

MARC has affirmed its AA-_IS rating on MMC Corporation Berhad’s (MMC) RM2.5 billion Sukuk Murabahah Programme with a stable outlook.

The rating reflects MMC’s longstanding track record and strong market position in key sectors of the domestic economy namely ports, engineering and utilities. Its ports and utilities divisions which are underpinned by long-term concessions, and its engineering division by sizeable government-related infrastructure contracts provide steady earnings visibility. The rating is mainly constrained by MMC’s increased leverage position, largely due to the debt consolidation of the recently acquired Penang Port and by the increase in planned capex for its port operations that may weigh on liquidity over the near term.

The stable outlook assumes that MMC’s leverage position does not deteriorate from current levels with the expectation that its net DE ratio would trend down to around 0.8x over the near term. The outlook also assumes the sustainability of the dividend-paying capacity of MMC’s key subsidiaries and associates to support the group’s financial obligations.

MARC notes that with the addition of Penang Port to its ports portfolio in May 2018, MMC has further strengthened its position as the largest domestic container terminal operator, handling about 58% of Malaysia’s total container market share with a throughput of 14.2 million twenty-foot equivalent units (TEUs) in 2018. Its five ports will eventually be held under intermediate holding company MMC Port Holdings Sdn Bhd. MMC’s key port Pelabuhan Tanjung Pelepas (PTP) remains one of the top 20 busiest ports in the world. Its Northport in Port Klang has continued to face challenges stemming from the changes in global shipping alliances which have resulted in transhipment volumes decline sharply, although the impact has been mitigated by improvements in local container shipment, dry bulk and liquid bulk. Both its Johor Port and Penang Port were less affected by the changes in shipping alliances as they largely serve the hinterland.

MMC group has earmarked RM1.1 billion in capex spending in 2019 to increase handling capacities and improve operating efficiencies of its ports. This is expected to be funded by a mix of the subsidiaries’ internal cash and bank borrowings. The increase in MMC’s consolidated borrowings, which stood at RM10.6 billion as at end-9M2018 (end-2017: RM8.8 billion), has led to a net DE ratio of 0.92x as at end-9M2018 (end-2017: 0.76x) and is largely attributed to the consolidation of Penang Port’s outstanding borrowings of RM1.0 billion. MMC also paid RM220 million for the remaining 51% stake in Penang Port in 2018. MARC views the full acquisition of Penang Port as positive as the port is earnings accretive with an operating cash flow of approximately RM200 million p.a.

MARC notes the engineering division’s outstanding order book of RM13.7 billion as at end-9M2018 which will provide earnings visibility through 2022. Of this, the KVMRT Line 2 project accounted for a sizeable RM10.1 billion despite a cost reduction of RM8.8 billion following negotiations with the government which has also converted the status of joint-venture company MMC-Gamuda Sdn Bhd from a project delivery partner (PDP) to a turnkey contractor. As a result, the joint-venture’s construction profit would now be reliant on managing profit margins rather than earning a fixed fee as a PDP. Given the company’s longstanding expertise in infrastructure development, MARC views the role change would not materially affect MMC-Gamuda’s ability to secure contracts in the construction industry.

MMC’s utilities business comprising associate stakes in Malakoff Corporation Berhad and Gas Malaysia Berhad provides the group with sizeable annual dividend income. The two entities have collectively upstreamed annual dividends of between RM90 million and RM300 million over the past three years.

For 9M2018, the group recorded a 26.1% y-o-y decrease in pre-tax profit to RM193.1 million, although revenue rose to RM3.4 billion (9M2017: RM2.9 billion). The lower profit was mainly attributable to the near completion of its RAPID material offloading facilities operations at Johor Port and lower container volume handled by Northport. In addition, the group incurred higher depreciation and amortisation charges following the capex undertaken at its ports.

At the holding company level, MMC’s revenue comprised dividend income and construction revenue, mainly from its KVMRT underground work packages. Historically, dividends from its ports and logistics, and energy and utilities divisions have been sufficient to meet the holding company’s finance service obligations. Including earnings from construction operations, the holding company generated cash flow from operations (CFO) of RM536.2 million, which translated into a CFO interest cover of 2.97x in 2017 (2016: 2.02x).

Its near-term borrowings are expected to be refinanced upon maturity; the group has unencumbered cash balance of RM805 million and owns about 5,000 acres of land, mostly in Senai Airport City (SAC), Johor which is a source of financial flexibility. MMC is targeting to dispose 30.2 acres in SAC and Senai Airport for RM66.2 million, proceeds from which would be used to meet its financial obligations. The group’s RM1.9 billion in unutilised credit lines also provides additional funding flexibility.

Major Rating Factors

Strengths

• Largest port operator in the country;
• Strong competitive position in port operations, engineering and utilities; and
• Stable earnings from a portfolio of concession assets.

Challenges/Risks

• Increase in capital investments for ports operations; and
• Managing debt metrics.