CREDIT ANALYSIS REPORT

MMC CORPORATION BERHAD - 2022

Report ID 6053890046978 Popularity 971 views 118 downloads 
Report Date Nov 2022 Product  
Company / Issuer MMC Corporation Berhad Sector Trading/Services - Conglomerates
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Rationale
Rating action

MARC Ratings has affirmed its rating of AA-IS on MMC Corporation Berhad’s (MMC) RM2.5 billion Sukuk Murabahah Programme with a stable outlook. Total outstanding under the programme stood at RM2.1 billion as of October 31, 2022.

Rationale

MMC’s significant and longstanding competitive strengths through subsidiaries and associates in the ports and logistics, engineering, and energy and utilities divisions that have translated into strong dividend-paying capabilities remain key rating drivers. The key moderating factor is its high leverage position resulting mainly from the issuance of a RM2.94 billion hybrid instrument as part of a privatisation exercise completed in December 2021.

MMC is an operating holding company with three key divisions: ports and logistics (through subsidiaries), engineering (through subsidiaries and joint ventures), and energy and utilities (mainly through associates). For 1H2022, the group recorded 3.1% higher revenue y-o-y to RM2.4 billion but lower pre-tax profit of RM463.5 million from RM493.6 million due to higher fuel costs at the ports. The slight increase in revenue was primarily due to higher conventional cargo volume handled at its Northport, and higher port tariffs at its Penang Port and Johor Port from October 1, 2021. Group performance benefitted from sale of industrial land parcels at Senai Airport City (SAC), an integrated development comprising industrial (2,066 acres) and mixed-use (652 acres) land that is being developed by Senai Airport City Sdn Bhd, an indirectly wholly-owned subsidiary of MMC.

For 1H2022, MMC’s ports overall recorded 17.9 million freight weight tonnes (FWT) of conventional cargo, partly offsetting the decline in container throughput volume to 7.9 million twenty-foot equivalent units (TEU) (1H2021: 17.5 million FWT; 8.5 million TEUs). The container throughput volume was affected by China’s strict pandemic-related measures which led to disruption in liners’ schedules. For its engineering division, outstanding construction order book stood at RM581 million as at end-June 2022 as its key projects — the Klang Valley Mass Rapid Transit (KVMRT) Line 2 and Langat Sewerage — are reaching their tail end. MARC Ratings expects MMC to replenish its order book based on the group’s demonstrated capability in undertaking key infrastructure projects in the country. In addition to tendered contracts worth RM2.5 billion, MMC also recently participated in the tender for the KVMRT Line 3 project. 

MMC continues to benefit from steady performance of its energy and utilities associates, namely Malakoff Corporation Berhad and Gas Malaysia Berhad. Malakoff has an effective generation capacity of 5,836MW in Malaysia (or about 22% of total generation in Peninsular Malaysia) comprising six power plants through five subsidiaries and a 40%-owned associate. Gas Malaysia is an investment holding company whose subsidiary owns, develops, operates and maintains a distribution pipeline for the delivery of gas under a 20-year license ending January 2040. 

At the holding company, revenue comprises construction receivables and dividends. Construction receivables declined from RM1.4 billion to RM878.5 million between 2018 and 2021 as major projects are nearing completion. Meanwhile, dividends have doubled from RM294.0 million to RM647.5 million during the same period, supported by a sharp rise in contribution from the engineering division (namely from KVMRT Line 2), and the ports and logistics division (namely from Northport and Pelabuhan Tanjung Pelepas (PTP)).

Total borrowings at the holding company declined marginally to RM2.7 billion as at end-2021 (end-2020: RM2.8 billion), but overall this has substantially decreased from RM3.6 billion as at end-2018. In tandem with the decline, finance cost has declined sharply to RM151.4 million from RM195.0 million. Of the total borrowings, maturing short-term loans comprise RM55 million term loan, and RM100 million sukuk that the company expects to redeem when it matures in April 2023. Its cash balance at the holding company of about RM1.3 billion and expected dividends would be sufficient to meet the maturing borrowings. 

Adjusted total borrowings of RM3.5 billion includes the 25% debt portion of the RM2.94 billion hybrid instrument issued to shareholder Seaport Terminal (Johore) Sdn Bhd as part of the privatisation exercise. MARC Ratings has accorded a 75% equity credit to the instrument under its methodology. We expect the company to manage distribution on shareholder's advance (the hybrid instrument) and upstreaming of dividends in line with its financial obligations. 

Outlook

The stable outlook reflects MARC Ratings’ expectation that the group’s ports and key business divisions will remain competitive, which would enable MMC to continue generating fairly steady earnings. 

Rating trajectory

Upside scenario

Any upgrade or revision to the positive outlook may be considered on sustained improvement in the debt servicing metrics of both the group and the holding company.

Downside scenario

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

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
  • Replenishing construction order book
  • Potential slowdown in global trade environment 

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