CREDIT ANALYSIS REPORT

MMC CORPORATION BERHAD - 2021

Report ID 60538900457 Popularity 67 views 21 downloads 
Report Date Dec 2021 Product  
Company / Issuer MMC Corporation Berhad Sector Trading/Services - Conglomerates
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Rationale
Rating action     
MARC has affirmed its rating of AA-IS on MMC Corporation Berhad’s (MMC) RM2.5 billion Sukuk Murabahah Programme with a stable outlook.

Rationale     
MMC’s significant competitive strengths in the ports and logistics, and engineering segments that have translated to strong earnings generation remain key rating drivers. The group’s performance is further supported by steady earnings from its energy and utilities segment. Key moderating factor is the group’s relatively high leverage position following a recent privatisation exercise.

We note under the privatisation exercise, Seaport Terminal (Johore) Sdn Bhd has assumed 100% control of MMC through selective capital reduction of RM2.94 billion. The group has restored its equity base via an issuance of a hybrid instrument of an equivalent amount to which MARC has provided a 75% equity credit under its methodology on equity credit of hybrid instruments. Its leverage post-privatisation would be about 1.0x (pre-privatisation: 0.89x). We also note that there is no change in MMC’s corporate structure post-privatisation. 

MMC’s ports and logistics division has benefited from a rebound in trade activities, surge in pent-up demand and global port congestion since 2H2020. Combined container throughput volume at its ports for 1H2021 was significantly higher at 8.5 million twenty-foot equivalent units (TEUs) (1H2020: 7.0 million TEUs). Revenue has accordingly risen 19.3% y-o-y to RM1.8 billion. We view that growth momentum will remain in the near term on the back of expected economic recovery. 

For its engineering segment, revenue declined 11.4% y-o-y to RM448 million due to lower work progress from the Klang Valley Mass Rapid Transport (KVMRT) Line 2 and Langat Sewerage projects which are nearing completion. The key ongoing project, the KVMRT Line 2, is progressing well with expected completion by January 2023. The group has near-term earnings visibility, mainly from a construction order book of RM1.8 billion as at end-June 2021. Going forward, the group’s performance would hinge on securing tendered projects worth about RM2.7 billion. The group is also pursuing potential internal projects worth about RM400 million over the next few years. We view MMC has proven capabilities to be able to secure major infrastructure projects on the back of improved prospects for the construction industry. 

Its energy and utilities division is driven by its two associate companies; Malakoff Corporation Berhad (Malakoff) and Gas Malaysia Berhad, performance of both have remained steady. This largely reflects the companies’ entrenched position in their respective businesses supported by tariff structures. The two entities have collectively upstreamed annual dividends of between RM97 million and RM166 million over the past three years.

In 1H2021, group revenue increased 10.4% y-o-y to RM2.3 billion and pre-tax profit by twofold y-o-y to RM494 million, underpinned by strong performances of its ports, namely Pelabuhan Tanjung Pelepas (PTP) and Northport. Correspondingly, operating profit margin improved to 27.4% (1H2020: 21.5%). As at end-June 2021, total borrowings stood at RM9.5 billion (end-2020: RM9.8 billion). MARC has accorded 75% equity credit to such issuance based on the terms, which includes a 10-year non-call period and a deferrable distribution feature. 

At the operating holding company level, dividend income and steady earnings from construction activities remained supportive of finance servicing obligations on borrowings of RM2.8 billion as at end-2020. Including earnings from construction operations, the holding company generated cash flow from operations (CFO) of RM1.0 billion, which provided an interest coverage ratio of 6.24x in 2020 (2019: 7.40x). MMC’s cash balance of RM2.3 billion as at end-June 2021 provides liquidity to the group, supported by unutilised credit facilities of approximately RM2.1 billion and proceeds from potential sale of about 105 acres in Senai Airport City (SAC).

Outlook     
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.

Rating trajectory     
     
Upside scenario     
Any upgrade or revision to the positive outlook may be considered on sustained improvement in the group’s debt servicing metrics.

Downside scenario     
The rating and/or outlook could be under pressure on weakening of leverage position if the group takes on additional borrowings to fund its capex requirement.

Key strengths
Largest port operator in the country
Strong competitive position in port operations, engineering and utilities
Stable earnings from a portfolio of concession assets

Key risks
Managing capital investments for port operations
Moderating construction order book


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