MARC has affirmed its AA-_IS rating on MMC Corporation Berhad’s (MMC) RM2.5 billion Sukuk Murabahah Programme with a stable outlook.  

MMC’s significant competitive strengths in the engineering, ports and logistics segments that have translated to strong earnings generation remain key rating drivers. This is supported by the steady earnings from its energy and utilities segment. These strengths have enabled the group to weather the current uncertain economic environment which was impacted by the COVID-19 pandemic. 

MMC’s port segment has been largely cushioned by the pandemic as reflected by a marginal growth of 0.9% y-o-y in 9M2020 for the group’s combined container handling volume. This was largely due to strong handling volumes recorded in 1Q2020 which moderated the impact in 2Q2020, followed by a subsequent recovery in 3Q2020. In light of the prevailing challenging economic and industry outlook, the group has also been selectively prioritising the near-term capex of its ports, involving deferment of non-critical expenditure particularly for Penang Port and Pelabuhan Tanjung Pelepas (PTP).

Meanwhile, construction projects under the group’s engineering segment experienced a slowdown during the movement control order (MCO) period, resulting in lower progress billings and hence group revenue. Nevertheless, earnings from this division were supported by improved margins due to MMC’s ability to manage its construction costs particularly for the Klang Valley Mass Rapid Transit (KVMRT) Line 2 project undertaken via a joint venture with Gamuda Berhad and Langat Sewerage project. As at end-June 2020, the construction order book stood at RM4.9 billion which will provide earnings visibility through 2022. The group is working on replenishing its construction order book, having tendered for a number of projects with a combined contract value of RM3.6 billion. The group’s strong track record in infrastructure construction places it in good stead to secure more transportation infrastructure contracts for which the government has allocated RM15 billion under the 2021 Budget.

Its utilities operations, undertaken by associate companies Malakoff Corporation Berhad (Malakoff) and Gas Malaysia Berhad, have remained stable. The regulatory changes in the natural gas distribution mechanism and the potential regulatory change in the domestic power sector are not expected to have significant impact on the group’s utility businesses given its entrenched position in the sector. The two entities have collectively upstreamed annual dividends of between RM90 million and RM166 million over the past four years. 

For 9M2020, group pre-tax profit increased by 7.6% y-o-y to RM366.7 million on revenue of RM3.2 billion, largely due to higher volume handled at its ports and improved contributions from its associate companies. Consolidated cash flow from operations remained strong at RM1.44 billion, largely driven by port operations. Group leverage, which remains a moderating rating factor, declined slightly to 0.98x (2019: 1.03x) on lower borrowings of about RM10.0 billion, although the strong cash balance of RM2.8 billion translated into an improved net debt-to-equity (DE) ratio of 0.70x (2019: 0.79x).

At the operating holding company level, dividend income and steady earnings from construction activities remained supportive of finance servicing obligations on borrowings of RM3.2 billion, part of which were used towards portfolio investments. Including earnings from construction operations, the holding company generated cash flow from operations (CFO) of RM1.3 billion, which provided an interest cover of 7.40x in 2019 (2018: 1.16x). Its financial flexibility is supported by a cash balance of RM779.0 million as at end-2019 as well as available financing facilities amounting to RM2.3 billion and the potential sale of land parcels measuring 93 acres in Senai Airport City (SAC).

The stable outlook reflects MARC’s expectation that the group’s ports and key business segments will exhibit comparable y-o-y performance, which would enable MMC to continue generating fairly steady earnings. The group is expected to maintain its key financial metrics which are in line with the current rating band.