CREDIT ANALYSIS REPORT

MALAYSIA MARINE AND HEAVY ENGINEERING HOLDINGS BERHAD - 2021

Report ID 605389051 Popularity 41 views 4 downloads 
Report Date Sep 2021 Product  
Company / Issuer Malaysia Marine and Heavy Engineering Holdings Berhad Sector Infrastructure & Utilities - Oil & Gas
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Rationale
Rating action     
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. There is no outstanding under the programme. 

Rationale     
The rating is mainly driven by MHB’s conservative balance sheet and strong liquidity position as well as  strong competitive position as the largest domestic offshore fabricator. The rating also benefits from a one-notch uplift based on MHB’s status as a member of the Petroliam Nasional Berhad (PETRONAS) group and MARC’s view of continued business support from the group. The rating is moderated by the financial impact from operational disruptions caused by the COVID-19 pandemic. 

The pandemic has delayed MHB’s construction works, resulting in slower revenue recognition in its key heavy engineering segment. The impact from the pandemic has also contributed to additional costs to expedite projects and led to substantial asset impairments. In its marine business segment, MHB faces challenges in securing foreign vessel contracts due to various restrictions including a travel ban on foreign experts. These have all contributed to MHB posting pre-tax losses of RM401.3 million in FY2020 and RM141.8 million in 1H2021 and are expected to continue weighing on MHB’s operations and financial performance in 2021. Notwithstanding this, near-term financial risk is substantially mitigated by MHB’s strong liquidity position with cash and bank balances of RM625.0 million as at end-June 2021. 

MHB is discussing with its key client for existing heavy engineering projects on potential extensions of time (EOT). The EOT will mitigate any liquidated damages for the delay in construction works. MHB will also be submitting variation orders for additional costs related to the pandemic.

As at end-June 2021, MHB’s heavy engineering order book increased to about RM2.7 billion (2020: RM1.9 billion) after it secured a RM1.1 billion engineering, procurement, construction, installation, and commissioning (EPCIC) contract for the Jerun Development Project in 1Q2021. The contract incorporates clauses on variation orders for unanticipated costs due to the pandemic. MHB’s existing order book provides earnings visibility until 2024 from this segment.

For 1H2021, the group’s pre-tax losses were partly due to additional cost provisions recognised as a result of a commissioning delay at an ongoing project. MHB continues to maintain a conservative balance sheet, with total borrowings of RM319.4 million and a debt-to-equity (DE) ratio of 0.17x as at end-June 2021. Borrowing levels are not expected to increase in the near term as there are no further projects in the pipeline. Its last major project was the construction of its Dry Dock No 3 for RM500.0 million, which was completed in 2020.

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

Rating trajectory

Upside scenario     
An upgrade of its standalone rating could be considered in the medium term should MHB manage to significantly increase earnings contribution from the more stable marine business segment and consistently maintain positive cash flow generation.

Downward scenario     
The standalone rating could be lowered in the event that the company’s liquidity position reduces significantly and is unable to cushion the volatility of MHB’s financial performance.

Key strengths
  • Longstanding track record in offshore construction and marine repair services
  • Conservative balance sheet and strong liquidity position
  • Leading player in the domestic offshore fabrication industry
Key risks
  • Replenishment of order book
  • Operational challenges arising from COVID-19 pandemic
  • Intense competition from international players
 

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