MARC has affirmed its AA- rating on Scomi Group Bhd’s (Scomi) RM500 million Medium Term Notes Programme (MTN) and has revised the outlook on the rating to stable from negative. The rating affirmation takes into account Scomi’s reduced dependence on its oilfield services division with higher earnings contributions from its engineering and marine business divisions and the additional capital raised through its recently completed rights issue, which provides greater visibility for near-term repayments on the rated programme. However, the rating and its outlook remain under pressure from the weak performance of Scomi’s oilfield services division stemming from the sharp reduction in drilling activity in the Western hemisphere.

Scomi’s oilfield services division under 76.1%-owned Scomi Oilfield Ltd (SOL) accounts for 68% of the group’s revenue, and is involved in providing integrated drilling fluids (DF) and drilling waste management (DWM) services, machine shop and oilfield product distribution services. The group is the third-largest player in the global DWM industry, with operations located in 29 countries and a well diversified client base of international oil majors. Its revenue which was compounding at an average annual rate of 25.4% for the last four year period up to the financial year ended December 31, 2008 (FY2008), contracted 18% on an annualised basis in 3QFY2009, mainly on account of a decline in drilling activity in the Western hemisphere, particularly in US, UK and Norway. This has intensified the competition between DF players and other DWM players in Scomi’s key markets of Asia, Middle East and Africa. Recent cost reduction initiatives, which were undertaken with a view to reduce SOL’s cost structure to a level that is consistent with the decline in demand throughout its markets, has prevented a sharp fall in the results of its oilfield services. The oilfield services segment reported an operating profit before interest and tax of RM91.9 million for the nine months ended September 30, 2009 compared to RM95.4 million for the previous corresponding period. Nonetheless, SOL’s performance has fallen considerably short of its earlier projected growth trajectory, which MARC believes was the basis of earlier substantial investments in capital expenditure. Nearer term prospects of recovery for the oilfield services division, meanwhile, appear limited with the slower-than-expected pick-up in US and North Sea drilling activities.

The increased revenue and earnings contribution from Scomi’s energy and logistics engineering division has compensated, to some extent, for the weaker-than-expected performance of the oilfield services division. Scomi’s 69.8%-owned subsidiary, Scomi Engineering Bhd is in a consortium with Larsen and Toubro Ltd to construct a 19.2 km monorail track in Mumbai, India. Contribution from Scomi’s rail division has increased following the commencement of the Mumbai monorail project. Scomi Rail Berhad is also involved with the expansion of the Kelana Jaya PUTRA Line and is actively bidding for projects in other developing countries. Meanwhile, 42.8%-owned Scomi Marine Bhd is also providing steady contributions from its coal transportation and offshore support vessel operations. The reduced dependence on the oilfield services segment has helped to moderate the pressure on consolidated earnings stemming from challenging operating conditions in the global DWM industry.

In 3QFY2009, the group’s consolidated revenue of RM1,487.9 million (FY2008: RM2,106.1 million) fell by 5.8% on an annualised basis as contributions from the oilfield services division declined by 12.2%. However, Scomi managed to maintain its operating profit margin at 8.67% (FY2008: 8.89%) through its timely cost-cutting measures. Nevertheless, earnings are not expected to increase significantly in the intermediate term due to prevailing weakness in global drilling activities. In 3QFY2009, Scomi recorded a CFO of RM31.0 million (FY2008: RM52.2 million) which continues to be pressured by increases in working capital requirements. The debt-to-equity ratio, which stood at 1.16 times as at September 30, 2009 (December 2008: 1.17 times), will be reduced to 0.94 times (calculated on a pro-forma basis) from completion of the rights issue, and augurs well for Scomi’s credit profile.

The stable outlook reflects MARC’s opinion that Scomi possesses adequate financial flexibility as the parent company of listed subsidiaries, Scomi Engineering Bhd and Scomi Marine Bhd, to meet the remaining debt commitments under the rated facility.

Contacts:
Eric Chua 03-20902245/ cheekiong@marc.com.my;
Ahmad Rizal Ahmad Farid, 03-2090 2253/ arizal@marc.com.my;
Anandakumar Jegarasasingam 03-20902250/ kumar@marc.com.my;