MALAYSIA MARINE AND HEAVY ENGINEERING HOLDINGS BERHAD - 2019

MARC has affirmed its rating of AA-_IS on Malaysia Marine and Heavy Engineering Holdings Berhad’s (MHB) RM1.0 billion Sukuk Murabahah Programme with a stable outlook.

The affirmed rating incorporates a one-notch rating uplift based on MHB’s status as a member of the Petroliam Nasional Berhad (PETRONAS) group of companies. PETRONAS carries a AAA/stable rating from MARC. MHB’s standalone rating reflects its strong competitive advantage stemming from its position as the largest offshore fabricator in the country. Its conservative balance sheet and strong liquidity position continue to underpin the rating. Moderating the rating is the weaker-than-expected order book replenishment that has continued to weigh on MHB’s performance.

The stable outlook assumes improvement in MHB’s order book and that its healthy liquidity position will be maintained.

As at end-2018, MHB had a sizeable RM5.5 billion worth of contracts in its tender book, the majority of which comprises contracts from related companies, leading to a higher likelihood of it being awarded some of these contracts. This would improve its modest order book of RM826.0 million (end-2017: RM1.3 billion). However, should MHB’s order book substantially weaken in the near term, leading to a strain on its liquidity, its current standalone rating could come under pressure.

MHB’s existing contracts consist of the engineering, procurement, construction, installation and commissioning (EPCIC) of an offshore central processing platform for the Bokor Phase 3 Re-development project in Sarawak which is expected to be completed in 2020. MARC understands that MHB has signed a six-year long-term agreement (LTA) with Saudi Arabian Oil Company (Saudi Aramco) in collaboration with TechnipFMC Plc (TechnipFMC). It was also awarded a frame agreement by PETRONAS for two packages of engineering, procurement and construction contracts during 4Q2018.

For 2018, MHB’s revenue was relatively unchanged at RM974.4 million y-o-y (2017: RM956.4 million). However, MHB recorded pre-tax loss of RM124.1 million (2017: pre-tax profit of RM11.0 million) mainly due to significant losses of RM81.7 million in its marine business unit. Its other key segment, heavy engineering, remained in the red, recording a loss of RM39.0 million in 2018 on low revenue following the completion of contracts.

Despite incurring losses from its operations, MHB’s cash flow from operations (CFO) remained positive at RM51.4 million on the back of lower working capital requirements. Liquidity remained strong with cash balances of RM589.3 million as at end-2018. As at end-2018, MHB’s borrowings stood low at RM48.4 million. MHB plans to draw down an additional RM350.0 million to finance the construction of a third dry dock which would raise its debt-to-equity (DE) ratio to about 0.16x.

Major Rating Factors

Strengths

• Leading player in the domestic offshore fabrication industry;
• Longstanding track record in offshore construction and marine repair services; and
• Conservative balance sheet and strong liquidity position.

Challenges/Risks

• Replenishing order book; and
• Intense competition from international players.