MARC has assigned a rating of A to Handal Offshore Services Sdn Bhd’s (“Handal” or the “Company”) RM50 million Medium-Term Notes Programme (“MTN Programme”). The rating carries a stable outlook. Handal is a full line offshore crane manufacturing and service company specializing in the production of offshore pedestal mounted cranes for the oil and gas (“O&G”) industry. 

The rating reflects the Company’s position as a niche player in the crane and manufacturing industry backed by technical support from a strategic foreign partner, its long-term contracts with several oil companies, and the favourable growth prospects for the offshore crane manufacturing. The rating is further supported by the issue structure, namely the assignment of all proceeds arising therefrom under present and future contracts of Handal and the sinking fund provisions.  Moderating the ratings however, are its small size, high working capital intensity, moderate financial leverage as well as a high degree of industry and customer concentration.

The state of the O&G industry, in particular, the exploration segment of the offshore O&G industry continues to exert a major influence on the demand for offshore cranes. The high oil and gas prices have stimulated increased exploration activity within the oil and gas sector. Field life extensions and new field developments drive the demand for offshore exploration platforms and rigs, which in turn, generates demand for offshore cranes. MARC believes that the growth prospects for the offshore crane manufacturing and maintenance will remain favourable in the near to intermediate term. An estimated 13 to 14 additional oil and gas platforms need to be built per annum over the next five years in Malaysia, which will bring the total number of platforms to between 318 and 323 from 253 presently.

Based in Kemaman Supply Base, Terengganu, Handal’s activities include the overhaul and maintenance, manufacturing and fabrication of new offshore pedestal cranes and other services such as supply of parts and manpower for crane operators. The Company’s competitive position is supported by the industry’s high barriers to entry in the form of specialized technical expertise and high cost of investment. Its ability to secure new contracts and contract extensions is underpinned by its long-term relationship with established and creditworthy customers mainly ExxonMobil Exploration and Production Malaysia Inc (“EMEPMI”) and PETRONAS Carigali Sdn Bhd (“PCSB”). In May 2006, Handal secured approximately RM125 million worth of contracts from EMEPMI and PCSB to perform the provision of integrated offshore crane services in the 26 offshore O&G fields located 200km of the coast of Terengganu for a duration of five years with one-year plus one-year contract extension options (5+1+1 years).

Handal is a PETRONAS registered and licensed company. The Company is also registered with the American Petroleum Institute (API) Quality Registrar and adheres to the quality controls under the relevant API standards in its operations. Handal’s strategic partnership with its foreign partner, Excell Crane & Hydraulics Inc, ensures the company remains abreast with technology changes.

Handal’s revenue increased from RM8.32 million in FYE December 2002 to RM39.22 million in FYE December 2006 at a compounded annual growth rate (CAGR) of 47.4% per annum. The Company’s OPBIT margin has been on an upward trend recording at 19.44% as at FY2006. However, the cash flow from operations has been uneven in the past. The cash flow deficit of RM0.02 million in FYE2006 arose on account of a delay in receivable collection, as well as increases in inventory holdings and unbilled work-in-progress.

Handal’s debt leverage ratio was maintained at about 0.90 times for the last three years. About 88% of Handal’s total debt of RM11.9 million as at end FY2006 was short form, in the form of either overdrafts or banker’s acceptances. The remaining 12% was related to long term loans.

The outlook reflects an expectation that the favourable industry fundamentals and Handal’s competitive position will enable the Company to maintain a financial profile that is supportive of the current rating.