MARC has affirmed its ratings of AA-IS and MARC-1ID /AA-ID on Alam Maritim Resources Berhad’s (Alam Maritim) RM500 million Sukuk Ijarah Medium Term Notes and RM100 million Commercial Papers/Medium Term Notes facilities respectively. Alam Maritim’s ratings are supported by its strong profitability and cash flow generation ability which have led to improved liquidity and lower gearing. The ratings are moderated by concerns on the potential lower utilisation of vessels over the immediate term due to the expiry of several spot contracts in 3Q2009 and the group’s worsening trade receivables position. MARC also notes the group’s intention to participate in underwater pipe-laying activities which could lead to additional execution risk. However, the stable outlook on the ratings reflects MARC’s expectation that the group will be able to continue securing charter contracts over the near to medium term to maintain adequate vessel utilisation levels and credit measures supportive of current ratings. Actual worse-than-assumed vessel utilisation levels will likely exert pressure on the group’s ratings and/or outlook.

Alam Maritim has established itself as one of the leading domestic offshore support vessel (OSV) operators, and is also venturing into the underwater support services business. The group owns 30 Malaysian-flagged vessels, comprising mostly anchor handling tug supply (AHTS) and platform supply vessels. On November 30, 2009, Alam Maritim announced a joint-venture with Lembaga Tabung Haji to finance six AHTS vessels, which secures financing for the group’s remaining deliveries until 2010. The financing structure is expected to increase the group’s off-balance sheet funding to RM380 million by FY2010. In the nine months ended September 30, 2009 (9MFY2009), vessel utilisation fell to 82% (FY2008 96%) due to Alam Maritim’s slow order book replenishment during the year amid lower activity by the oil majors. However, Alam Maritim’s charter income has held up, as evidenced by the segmental contribution from its OSV division. Nevertheless, the group’s outstanding contract value for its OSV division decreased to RM431.9 million as at October 30, 2009 (September 30, 2008: RM563.4 million), with a higher proportion of contracts which have to be renewed within the next 12 months. Taking into account the expected new deliveries, vessel utilisation will come under pressure unless the group is able to secure new charter contracts.

Alam Maritim’s underwater services division which used to be limited to rental of underwater diving equipment, has been widening its scope of operations to installation and commissioning of pipelines, underwater inspections and ship salvaging activities. The division increased its contribution to group consolidated revenue to 30% (FY2008: 20%). The group recently announced that it is entering a joint venture with OCI Energy Sdn Bhd and Ombak Marine Sdn Bhd to bid for a pipe-lay installation project, which MARC sees as an extension of Alam Maritim’s previously limited scope of activities as an asset provider. The group announced that it will separately enter a joint-venture with Swiber Offshore Construction Pte Ltd (Singapore) to finance a USD55 million 300MT pipe-lay barge. Although the group already owns most of the assets required, which will reduce working capital requirements, Alam Maritim will be exposed to additional execution risk on the contract.

Alam Maritim continued to display strong profitability and cash flow generation ability in 9MFY2009, recording a 27.2% increase in profit before tax to RM95.66 million (9MFY2008: RM75.22 million) from higher charter income, taking delivery of seven vessels in 2008. In 9MFY2009, cash flow from operations remained strong at RM81.54 million (FY2008: RM128.24 million) keeping pace with higher debt levels and financing costs from the group’s asset acquisition activities. The strong cash flow has supported higher cash retention, preservation of Alam Maritim’s credit metrics, and improved liquidity relative to its outstanding current borrowings. Alam Maritim’s debt-to-equity has decreased to 1.32 times as at September 30, 2009 (FY2008: 1.67 times) due to repayment of current borrowings. Alam Maritim’s adjusted debt-to-equity ratio which incorporates off-balance sheet borrowings, has also fallen to 1.65 times (FY2008: 1.99 times).

The group’s receivables performance has deteriorated, with days receivables increasing to 229 days in 9MFY2009 from 174 days in FY2008. The long turnover period is due to the group’s liberal credit policy which allows payment from main contractor clients to be made upon collecting payment from their customers. These contractors are subject to lengthy inspection and collection periods by the original contract awarders, and may take up to 180 days to make their payments, exposing Alam Maritim not only to slower receivables turnover but also the credit of their clients in addition to the performance risk of the contractors. .

The stable outlook on the ratings reflects MARC’s expectation that the group will be able to continue securing charter contracts over the near to medium term to maintain adequate vessel utilisation levels and credit measures supportive of current ratings. Actual worse-than-assumed vessel utilisation levels will likely exert pressure on the group’s ratings and/or outlook.

Contacts:
Anandakumar Jegarasasingam, 03-2090 2250/ kumar@marc.com.my;
Eric Chua, 03-2090 2245/ cheekiong@marc.com.my;
Taufiq Kamal, 03-2090 2251/ taufiq@marc.com.my