MARC has affirmed its rating of A on Handal Offshore Services Sdn Bhd’s (Handal) RM50.0 million Medium Term Notes Programme (MTN). The rating outlook has been revised to positive from stable. The affirmation of the rating is premised on greater earnings visibility from the company’s lifting solutions for workover projects division, which commenced operation in 2006 and the stable contribution from its integrated crane services operations. Also factored into the rating is the improved financial flexibility afforded to Handal through the listing of its holding company Handal Resources Berhad (HRB) on Bursa Malaysia in July 2009. The rating is, however, constrained by Handal’s current low cash flow coverage measures and concentrated earnings streams that are dependent on limited business activities catering to a few oil majors operating in Malaysia. The positive outlook on the rating is premised on the possible upside for Handal’s earnings from its newly completed fabrication yard, which is expected to commence operations by early 2010.

Handal specialises in servicing, maintenance, and manufacturing and fabrication of offshore pedestal cranes. The company recently completed construction of a fabrication facility on a leased 10-acre yard in Teluk Kalong, Kemaman Terengganu, which is expected to contribute positively towards its production capacity.  Handal is the only company to provide fully integrated offshore crane overhaul and maintenance services in Malaysia, which provides stable contribution to the company’s revenue and earnings. In addition, the company is also one of two American Petroleum Institute-licensed companies engaged in manufacturing and fabricating offshore pedestal cranes in the country.

In 2008, the company’s revenue grew by 9.0% (2007: 41.8%) to RM60.6 million with overall gross margin of 41.8%. The high growth rate in 2007 was attributable to the introduction of its workover projects lifting solution division (LSD). The LSD generated a high profit margin of 71.4% in 2008. Overall gross margin was lower at 41.8% in 2008 as compared to the previous year, due to the loss made by the manufacturing and fabrication division. This was, however, attributable to the year-end commencement of new crane manufacturing and fabrication projects, of which billing milestones were reached only in the following year. Profitability improved as of 9M2009 with more representative gross margins of 46.4% (2008: -10.7%) from manufacturing and fabrication, 75.5% (2008: 71.4%) from lifting solution divisions, and an improved gross margin of 48.4% (2008: 45.0%) from its integrated crane services contracts. Net profit for the financial year 2008 (FY2008) stood at RM9.3 million (FY2007: RM8.7 million), resulting in a return on equity (ROE) of 34.68%.

Meanwhile, the company’s borrowings increased further to RM35.8 million in 2008 (2007: RM33.6 million) with higher short-term commitments which included part of the MTN issued. Nevertheless, the company’s capital position improved on the back of a bigger equity base supported by a consistent accumulation of retained earnings. This, together with the gradual repayment of its term loans, resulted in its debt-to-equity (DE) ratio improving to 1.02 times as of 9M2009 (FY2008: 1.14 times). To-date, Handal has redeemed RM10 million of its MTN including an early redemption originally scheduled for October 2010. 

However, MARC notes that the company’s cash flow coverage measures have weakened due to debt financed capital expenditure incurred in 2008 resulting in an increase in financing cost. While Handal managed to maintain its CFO at RM5.3 million in 2007 and 2008, MARC notes that its larger capacity could result in increased working capital requirements that may impede its cash flow coverage measures. The company expects to finance its working capital requirements through unutilised credit facilities amounting to RM12.2 million and proceeds of its parent’s public issuance. Nevertheless, MARC also notes that the completion of the new fabrication yard marks the end of the company’s current capital expenditure cycle, and should enable the company to generate a positive albeit marginal free cash flow in 2009 (2007: -RM3.9 million).

A continuous improvement in Handal’s financial performance going forward, especially increased contribution from its newly constructed fabrication yard, together with improvement in its cash flow coverage measures could support an upgrade of its rating.

Contacts:
Anandakumar Jegarasasingam, 03-2090 2238/ kumar@marc.com.my;
Taufiq Kamal, 03-2090 2251/ taufiq@marc.com.my;
Eric Chua, 03-2090 2245/ cheekiong@marc.com.my