MARC Ratings has assigned a corporate credit rating of AA- to Orkim Sdn Bhd with a stable outlook.

The rating reflects Orkim’s leadership position in the domestic clean petroleum product (CPP) tanker market, with an estimated 17% market share by fleet size as of June 2023 , its long track record of steady operating performance and earnings visibility from charter contracts. The rating considers the high barrier to entry of the tanker transportation segment. Moderating the rating is Orkim’s high leverage position arising from continued capital requirement for vessel acquisitions. Additionally, contract renewal risk remains a concern although this is mitigated through longstanding relationships with its key demand drivers Petroliam Nasional Berhad (PETRONAS) and Shell Malaysia (Shell) since 2010. 

Orkim is the largest domestic vessel owner with 16 CPP tankers (and two liquified petroleum gas (LPG) tankers) of the approximately 94 CPP tankers  currently in operation. The company maintains a healthy mix of long-term contracts that provide earnings visibility and short-term contracts that can benefit from potential hikes in charter rates; seven of its 18 vessels are on long-term contracts ranging from five to 10 years. While the remaining vessels have a shorter contract duration, Orkim’s historical utilisation rate has been consistent at around 90%. 

MARC Ratings notes that while charter contracts are exposed to renewal risk, this risk is mitigated by the historical precedence for continued renewals reflecting Orkim’s capability and its longstanding relationships with customers. We believe renewal risk is also mitigated by the expected strong demand for CPP tankers on the back of stronger economic activities. Orkim has nine charter contracts that will be up for renewal in less than one year. In the event the contracts are not renewed, tankers can be chartered out in the spot market until new contracts are secured. In 2022, revenue from spot charters constituted 13% of Orkim’s total revenue.

We view Orkim’s strong market position as sustainable given the high barriers to entry due to (1) strict Health, Safety, Security and Environment (HSSE) requirements by oil majors; (2) stringent local regulations and licensing requirements including cabotage laws; (3) heavy reliance on operating track record and stability; and (4) limited financing support for new entrants. 

Orkim’s fleet of 18 vessels is relatively young, averaging 8.8 years. There are seven vessels, including five new tankers, that are under five to 10-year charter contracts and have an estimated revenue backlog of RM843.5 million as of end-May 2023. This lends support to revenue visibility through 2032. Orkim’s revenue grew at a compound annual growth rate (CAGR) of 9.8% in the five years to 2022. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins were strong at above 45% except in 2021 when it fell to 36.8% largely due to pandemic-related expenses. Orkim’s major cost is fuel. Movements in the bunker fuel prices, however, have limited impact on the company’s margin as there is a built-in adjustment mechanism to the base freight rates of the charter contracts. 

The financing for the five vessels acquired in 2021 for RM213.6 million saw debt-to-equity (DE) ratio increasing to 1.43x, before declining to 1.10x as at end-June 2023. Orkim’s plans to acquire seven new vessels — five of which are chemical tankers — between 2024 and 2026 for an estimated RM559.1 million would lead to higher borrowings in the medium term. Positively, however, vessel acquisitions are expected to come with locked-in contracts. Base case cash flow projections yield a minimum finance service cover ratio (FSCR) of 1.7x in 2024 and an average of 1.8x over a five-year forecast period through 2027. As regards DE ratio, we expect leverage metrics to improve over the forecast period given the company’s history of post-acquisition deleveraging through revenue and EBITDA growth. 

Orkim’s strategy to penetrate the chemical tanker segment will moderate its concentration risk and exposure to the vagaries of the fuel trade (product primarily carried by CPP tankers), especially in light of increasing threat to oil demand from greater adoption of electric vehicles. The chemical tankers can cater to a wider range of cargoes including chemical products that are widely used in industries. The plans for the chemical tankers are, however, subject to contract wins, currently still in the bidding phase. 

The stable rating outlook reflects our expectation that the group will maintain its business and credit profiles broadly in line with the rating band over the next 12 months.

An upgrade may be considered if Orkim can further build up its scale profitably on a sustainable basis and strengthen its balance sheet to a DE level of 0.5x. Downside rating pressures would occur if Orkim is unable to renew/secure charter contracts for its vessels that would weigh on cash flow generation and credit protection metrics.