CREDIT ANALYSIS REPORT

MISC BERHAD - 2019

Report ID 60455 Popularity 620 views 16 downloads 
Report Date Feb 2020 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 RM2.5 billion Islamic Medium-Term Notes (IMTN) programme. The outlook on the rating is stable. Currently, there is no outstanding amount under the IMTN programme.

MISC’s rating benefits from an uplift from its standalone rating based on the expectation of strong parental support from Petroliam Nasional Berhad (PETRONAS) given the operational and financial integrations between the companies. MISC serves as the main liquefied natural gas (LNG) shipping provider for PETRONAS, which currently carries a public information rating of AAA/stable from MARC. MISC’s standalone rating reflects its stable revenue generation from long-term LNG and offshore contracts, as well as its strong liquidity position. However, these strengths are moderated by its increased leverage level and revenue sensitivity towards the cyclical nature of the oil and gas (O&G) industry. The stable rating outlook reflects high expectations of continued parental support from PETRONAS. Consequently, any change to PETRONAS’s profile could impact the rating. 

MISC is a key global player in the energy-related shipping business and currently possesses a fleet of 123 vessels consisting of 31 LNG vessels, 65 petroleum vessels, 12 chemical vessels and 15 offshore floating assets as at end-September 2019. Its current fleet expanded from 116 vessels as at end-September 2018 (LNG: 29 vessels, petroleum and chemical: 72 vessels, offshore: 15 assets). The fleet expansion was substantially funded by debt which increased the group’s debt-to-equity (DE) to 0.39x (2018: 0.36x). MISC’s leverage could increase with the expected delivery of seven petroleum tankers by end-2020, two LNG vessels in 2021 and a further two LNG vessels in 2023. 

Notwithstanding the increased leverage level, MISC’s fleet expansion is earnings accretive with secured long-term contracts. As borrowings are raised at the project level, earnings generated from new long-term contracts should sufficiently cover its debt obligations. In 9M2019, MISC’s consolidated pre-tax profit stood higher at RM1,248.6 million (9M2018: RM988.8 million), on the back of a 3.1% y-o-y increase in consolidated revenue. These improvements are reflective of higher earnings contributed by its LNG segment, mainly due to fewer dry dockings in 2019 and the delivery and deployment of two LNG carriers in 4Q2018 and 1Q2019. 

Revenue from MISC’s petroleum segment remained flat y-o-y. Nevertheless, pre-tax losses narrowed significantly, benefitting from improved margins. Spot rates for petroleum tankers are expected to remain heightened in 4Q2019, which will continue benefitting the segment since 40% of MISC’s petroleum tanker fleet is currently chartered on a spot basis.

MISC’s heavy engineering segment successfully replenished its order book after securing an order for engineering, procurement, construction, installation and commissioning (EPCIC) works on the Kasawari gas development project (Kasawari). Total order book increased to RM2.7 billion, providing earnings visibility for the heavy engineering segment for the next three years.

Consolidated cash flow from operations (CFO) increased by 42.9% to RM4,144.4 million (9M2018: RM2,900.5 million) with a healthy CFO interest coverage ratio of 12.05x. The group’s liquidity position remained strong, with cash balances of RM7,410.3 million as at end-September 2019. 

As of January 1, 2020, the implementation of new emission standards by the International Maritime Organisation (IMO) entails a reduction in fuel oil sulphur content and may moderate earnings of shipping companies in the near term due to the higher cost of low sulphur fuel oil. MISC is unlikely to be affected as its exposure risk to the higher fuel cost is minimal, given that the majority of its LNG and petroleum fleet are on long-term charters which allocate bunkering costs to customers. Additionally, its petroleum fleet that are involved in lightering operations are already using compliant fuels. 

Major Rating Factors

Strengths
Leading domestic market position and stable cash flow from LNG shipping segment; 
High level of integration with parent PETRONAS; and
Strong liquidity position.

Challenges/Risks 
High capex requirement; and
Susceptibility to the cyclical nature of the oil and gas industry.


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