CREDIT ANALYSIS REPORT

MISC BERHAD

Report ID 605230 Popularity 529 views 8 downloads 
Report Date Aug 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 with a stable outlook. Currently, there is no outstanding amount under the programme.

The affirmed rating continues to benefit from rating uplift on MARC’s expectation of strong parental support from Petroliam Nasional Berhad (PETRONAS) based on the operational and financial integration between the companies. PETRONAS carries a AAA/Stable rating from MARC based on public information. MISC serves as the main liquefied natural gas (LNG) shipping provider for PETRONAS. 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 mainly moderated by the challenging conditions in the oil and gas (O&G) industry. 

MISC remains a key global player in the energy-related shipping business and currently possesses a fleet of 100 vessels consisting of 31 LNG vessels, 69 petroleum and chemical vessels, as well as 14 offshore floating assets as at end-March 2020. Its LNG shipping contracts are mainly on a long-term basis, which provides earnings visibility and is expected to mitigate the impact from the COVID-19 pandemic. Its LNG segment remains the main driver of group profitability. 

Its petroleum shipping segment benefitted in recent months from a spike in spot rates due to a sharp demand increase for cargo storage space as crude oil buyers were unable to take delivery of cargoes. This segment is exposed to earnings volatility given the nature of its contracts - about 29% of its vessels are on spot charters. MISC’s heavy engineering segment continues to face challenges in replenishing its stagnant order book, which is likely to be compounded by capex cuts by oil majors arising from weakening global economic conditions.

In 1Q2020, MISC’s revenue increased by 10.4% y-o-y to RM2,513.8 million on the back of higher revenue from the LNG, petroleum and heavy engineering segments. However, it posted losses of RM1,145.4 million largely from provisions made for litigation claims of RM1,984.4 million due to the unfavourable outcome on the Gumusut-Kakap arbitration proceedings. The group initiated legal proceedings on July 7, 2020, to challenge the arbitration decision. While new business prospects will be challenging under the current market conditions, MISC’s revenue growth will be driven by its newbuild of 10 petroleum shuttle tankers and four LNG vessels which are expected to be delivered between 2020 and 2023. 

Cash flow from operations (CFO) was strong at RM2,183.9 million (3M2019: RM1,355.8 million), with healthy CFO interest coverage of 18.70x at end-1Q2020. The group’s liquidity position remains strong, with cash balances of RM8,150.7 million. Gross debt-to-equity (DE) increased slightly to 0.39x in 1Q2020 (FY2019: 0.37x). Fleet expansion is expected to be financed by a 70:30 DE mix on a staggered basis, which implies that leverage position could rise. Notwithstanding this, MISC’s fleet expansion is earnings accretive with secured long-term contracts. As bank borrowings are raised at the project level, earnings generated from new long-term contracts should sufficiently cover its debt obligations. 

The stable rating outlook reflects high expectation of continued parental support from PETRONAS. Consequently, any change to PETRONAS’s profile could impact the rating.

Major Rating Factors

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

Challenges/Risks 
High capex requirement; and
Heavy engineering and offshore segments susceptible to vagaries of 
        oil and gas industry.

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