MARC has affirmed its AA-_IS rating on Malaysia Marine and Heavy Engineering Holdings Berhad’s (MHB) RM1.0 billion Sukuk Murabahah Programme with a stable outlook. Currently, the sukuk programme has no outstanding amount.

The rating incorporates a one-notch rating uplift based on MARC’s expectation of continued business support from its ultimate parent, Petroliam Nasional Berhad (PETRONAS). MHB’s standalone rating incorporates its strong competitive advantage as the largest domestic offshore fabricator, its conservative balance sheet and strong liquidity position. The rating is mainly moderated by the slow contract flow that has weighed on the performance of offshore fabricators, although there has been some improvement recently. The stable outlook incorporates MHB’s improved earnings visibility over the medium term from the increased order book size. 

As at end-September 2019, MHB’s order book rose to RM2.7 billion (2018: RM785.0 million) comprising largely of the RM2.2 billion engineering, procurement, construction, installation and commissioning (EPCIC) works for the Kasawari gas development project (Kasawari project) secured in 2019. While the awarded contract from PETRONAS demonstrates business support from the ultimate parent, it also reflects MHB’s competitive strength as the only domestic fabricator that can undertake such a huge structure. 

MHB’s existing contracts, including EPCIC of an offshore central processing platform for Bokor Phase 3, are near completion. However, revenue generation was not sufficient to cover overhead costs, resulting in continued losses for MHB’s heavy engineering segment in 9M2019. The losses were moderated by the improved operating performance of MHB’s marine business segment following an increase in dry docking services during the period. As a result, the company registered lower pre-tax losses of RM42.7 million. MHB is expected to be profitable in 2020 when the company recognises the revenue and profit from the Kasawari project as well as the completion of current projects such as Bokor CPP, Tembikai NAG and Pluto Water Handling Module. Going forward, the expected operation of a third dry dock by 2Q2020 will also provide opportunities to secure more vessel maintenance works.

Cash flow from operations (CFO) improved to RM137.5 million from RM65.2 million in the previous year’s corresponding period. CFO is expected to moderate in the near future as the company is mobilising its assets for construction of the new EPCIC project. The company is expected to utilise its cash balance of RM661.3 million as at end-September 2019 to cover any shortfall. The successful execution of the Kasawari project is important to support CFO generation and build up the liquidity buffer from 2020 onwards.

Free cash flow (FCF) was negative RM43.1 million due to capex for the construction of its third dry dock. FCF will remain negative until completion of the construction in 2020. The capex for the dry dock, which will be partially financed by bank borrowings, will increase MHB’s leverage. However, this is not a concern given MHB’s very low debt-to-equity (DE) ratio of 0.06x as at end-September 2019 and based on shareholders’ funds as at this date, pro forma DE ratio would increase to a modest 0.17x upon full drawdown of borrowings.