CREDIT ANALYSIS REPORT

MMC CORPORATION BERHAD - 2019

Report ID 60477 Popularity 1085 views 73 downloads 
Report Date Mar 2020 Product  
Company / Issuer MMC Corporation Berhad Sector Trading/Services - Conglomerates
Price (RM)
Normal: RM500.00        
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Rationale
MARC has affirmed its AA-IS rating on MMC Corporation Berhad’s (MMC) RM2.5 billion Sukuk Murabahah Programme with a stable outlook.  
The affirmed rating remains driven by MMC’s significant strength in ports and logistics, engineering, and utilities operations that continue to be steadily strengthened. Underpinned by long-term concessions (ports and utilities) and sizeable government-related infrastructure contracts (engineering), its businesses provide strong earnings visibility. The rating is mainly moderated by MMC’s consolidated leverage which has been compounded by the borrowings of its recently acquired Penang Port. Its consolidated leverage position is likely to remain moderately high over the near term as some of its port subsidiaries undertake planned capex. 

MMC’s position as the largest domestic container terminal operator has been strengthened with the addition of Penang Port. It handled about 55% of Malaysia’s total container throughput in 1H2019, with 7.1 million twenty-foot equivalent units (TEUs). Its key port Pelabuhan Tanjung Pelepas (PTP) in Johor remains one of the top 20 busiest ports in the world. Of its ports, Northport’s container traffic volume has been affected by the changes in global alliances, recording a 2.6% y-o-y decline to 1.3 million TEUs in 1H2019. Overall, the impact from shifts in global shipping alliances on the group has been largely offset by volume improvement in dry and liquid bulk handling, local container shipment for Northport and cargo handling for Johor Port and Penang Port.

MMC has a sizeable engineering order book, standing at RM9.3 billion as at end-1H2019 that provides earnings visibility through 2022. Of this, the Klang Valley Mass Rapid Transit (KVMRT) Line 2 project accounted for a sizeable RM7.3 billion. Its engineering contracts remain largely undertaken by joint ventures between MMC and Gamuda Bhd whose status has been changed to a turnkey contractor, resulting in reliance on managing construction costs to yield better profit margins as opposed to earning a fixed fee as a percentage of construction costs previously. In 2019, its engineering division registered an operating profit before interest, tax, and depreciation (OPBITDA) margin of 27.4% from 15.9% in the previous year. 

Its utilities operations, undertaken by associate companies Malakoff Corporation Berhad and Gas Malaysia Berhad, have remained steady. The regulatory changes in the natural gas distribution mechanism and the potential regulatory change in the domestic power sector are not expected to have any impact on the dividend payout capacities of both entities, which have collectively upstreamed annual dividends of between RM90 million and RM200 million over the past four years.

MMC has benefited from the uptrend in passenger traffic volume since 2012 at Senai International Airport which it operates and maintains under a 50-year government concession agreement ending in 2053. Its wholly-owned subsidiary, Senai Airport City Sdn Bhd, is the  master developer of Senai Airport City (SAC), comprising industrial (2,066 acres) and mixed-use (652 acres) land within the Flagship E of Iskandar Malaysia and well-connected to Senai Airport, Johor Port and PTP. Infrastructure work on 1,183 acres of the industrial segment has been completed with the 180 acres Free Industrial Zone (FIZ) already operational. 

In 2019, group pre-tax profit rose sharply by 32% y-o-y to RM533 million, mainly as a result of higher contributions from its port subsidiaries. Cash flow from operations (CFO) increased to RM2.2 billion, providing interest cover of 3.8x (2018: RM1.1 billion; 2.1x). Consolidated borrowings of RM10.4 billion translate to a debt-to-equity ratio of 1.04x (net-DE: 0.80x). In 2019, RM1.3 billion in term borrowings were due for repayment, RM1.0 billion of which, at subsidiary Penang Port, was refinanced with a sukuk issuance (AA-/stable). Another sizeable impending maturity of RM1.5 billion at PTP level in 2020 is expected to be refinanced. As MMC has earmarked about RM1.6 billion on capex for its port subsidiaries in the near term, group borrowings are not expected to reduce significantly. Improvement in leverage, however, would be supported by earnings retention. 

At the holding company level, MMC’s revenue comprised dividend income and construction revenue. Historically, dividends from its ports and logistics, and energy and utilities divisions have been sufficient to meet the holding company’s finance servicing obligations on borrowings of RM3.6 billion, part of which were used towards portfolio investments. Including earnings from construction operations, the holding company generated CFO of RM230 million, which provided an interest cover of 1.16x in 2018 (2017: 2.97x). Among its near-term borrowings, RM360 million of IMTN maturing in 2020 is expected to be redeemed upon maturity. Its financial flexibility is supported by an unencumbered cash balance of RM1.8 billion as at end-2019 and the potential sale of land parcels in Senai Airport City. 


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.

Challenge/Risk
Managing capital investments for port operations.

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