MISC BERHAD - 2018

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

MISC is a key subsidiary of the national oil company Petroliam Nasional Berhad (PETRONAS). The affirmed rating benefits from a rating uplift from PETRONAS based on the significant operational and financial integration MISC has with its parent given its role as the main provider of shipping services for PETRONAS’ liquefied natural gas (LNG). PETRONAS carries a public information rating of AAA/stable from MARC.  

MISC’s standalone credit profile is mainly driven by stable revenue generation from sizeable long-term LNG and offshore contracts as well as by its strong liquidity position. These strengths are moderated by MISC group’s susceptibility to the highly cyclical oil and gas (O&G) industry. The stable rating outlook reflects the expectation of continued parental support from PETRONAS and the ability of MISC to maintain its credit profile.  

MISC’s large fleet of vessels and offshore floating facilities have enabled it to remain a key global player in energy-related shipping businesses. Its sizeable long-term LNG shipping contracts with parent PETRONAS provide strong support to group performance which has been weighed down by recent challenges in the O&G industry, characterised by excess capacity, lower charter rates and reduced upstream activities.  

For the nine months ended September 30, 2018 (9M2018), MISC’s consolidated pre-tax profit was lower at RM988.8 million (9M2017: RM2.0 billion), on the back of a 15.9% y-o-y drop in consolidated revenue to RM6.4 billion. The decline reflects the continuing tough operating environment for the group’s key LNG and petroleum shipping segments. The LNG shipping segment recorded a revenue decline of 18.3% y-o-y to RM1.8 billion, largely on lower earning days due to lengthier vessel dry-docking and a lower rate of contract upon renewal of an LNG vessel. Its petroleum shipping segment registered flat revenue of RM3.0 billion y-o-y but incurred higher operating losses of RM121.0 million on higher bunker fuel costs and lower rates.  

MISC’s offshore business segment continued to provide a steady recurring income stream from its charters that have an average contract tenure of 13.8 years including extensions. However, its heavy engineering segment continued to be plagued by the weak replenishment of its order book and high operating costs, leading to losses for 9M2018. 

Consolidated cash flow from operations (CFO) remained strong relative to the group’s financial obligations, despite declining to RM2.9 billion in 9M2018 (9M2017: RM3.7 billion). It was sufficient to meet its capex of RM2.6 billion to fund the company’s recent vessel acquisitions and construction. Free cash flow (FCF), however, was negative mainly due to a dividend payout of RM1.1 billion. Liquidity position has remained strong, with a cash balance of RM5.3 billion as at end-September 2018. Over the next 24 months, FCF would remain pressured by the group’s plans to purchase nine new petroleum tankers, which is expected to be partly financed by borrowings. Debt-to equity (DE) ratio stood at 0.36x as at end-September 2018, with net DE ratio at 0.22x. Assuming MISC’s capital commitments are fulfilled via borrowings, DE ratio would be a manageable 0.43x. Currently, there is no outstanding amount under the MTN programme. 

Major Rating Factors 

Strengths 

• Leading domestic market position and stable cash flow from LNG shipping segment;  
• High level of integration with parent PETRONAS; and 
• Moderate financial leverage. 

Challenges/Risks  

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