CREDIT ANALYSIS REPORT

MALAYSIA MARINE AND HEAVY ENGINEERING HOLDINGS BERHAD

Report ID 605284 Popularity 187 views 10 downloads 
Report Date Oct 2020 Product  
Company / Issuer Malaysia Marine and Heavy Engineering Holdings Berhad Sector Infrastructure & Utilities - Oil & Gas
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Rationale
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. 

MHB’s strong competitive advantage as the largest domestic offshore fabricator, its conservative balance sheet and strong liquidity position are key rating drivers. The rating also incorporates a one-notch uplift based on the MHB’s status as a member of the Petroliam Nasional Berhad (PETRONAS) group and the rating agency’s view of continued business support from the group. The rating is moderated by the slow contract flow that is likely to worsen in the near term by the reduction in capex by oil majors in the current challenging oil price environment. 

MHB’s existing order book of RM2.6 billion as at end-June 2020 will only provide earnings visibility for the next two years. Its order book largely comprises the RM2.14 billion engineering, procurement, construction, installation and commissioning (EPCIC) works for the Kasawari gas development project (Kasawari project). MHB has faced some operational hitches due to the measures imposed to combat the COVID-19 pandemic; however, project completion risk is mitigated by the lengthy project time frame and MHB’s flexibility to adjust the project’s timetable.

The company had to make a RM90.0 million provision in 2Q2020 for claims from subcontractors and associated unabsorbed overheads arising from the extended project duration, mainly from the impact of movement restrictions due to the pandemic. Additionally, MHB registered RM300.0 million in asset impairments in 2Q2020 due to weakening market demand. As a result, MHB registered pre-tax losses of RM394.6 million in 1H2020. Cash flow from operations (CFO) was positive RM13.6 million on the back of a 4.6% y-o-y increase in revenue. 

Liquidity position was strong with a cash balance of RM641.2 million as at end-June 2020 that should mitigate any short-term liquidity constraint. Its leverage as reflected by a debt-to-equity (DE) ratio remains low at 0.10x, rising to proforma 0.20x upon full drawdown of RM400 million in bank borrowings for construction of the third dry dock. Currently there is no outstanding amount under the rated sukuk programme. 

The stable outlook reflects MARC’s expectation that MHB will maintain its credit profile in the next 12 to 18 months, underpinned by low leverage and a strong liquidity position. 

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.


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