MARC has upgraded Handal Offshore Services Sdn Bhd’s (Handal) RM50 million Medium Term Notes (MTN) rating to A+ from A. The outlook on the rating is stable. The rating upgrade reflects the company’s strong recurring earnings generation and profitability, supported by its defensible business position as Malaysia’s only fully-integrated offshore pedestal crane service provider and manufacturer. These strengths are partly offset by the higher business risks related to Handal’s entry into Indonesia’s offshore crane maintenance services market and its lengthening cash conversion cycle. MARC believes that tighter control over its inventory is needed for Handal to continue to exhibit satisfactory working capital metrics for its rating level.

In FY2009, Handal generated RM65.3 million in revenue, a 7.8% year-on-year increase. This, coupled with 3.6% decline in cost of sales, boosted operating margins to 33.4% (FY2008: 25.9%). Handal’s crane overhaul and maintenance services provide sizeable recurring revenue and earnings for the company. This reduces Handal’s dependence on oil and gas exploration and production spending levels to sustain its earnings performance. The company’s bottom line improved significantly with profit before tax increasing by 45.6%. The commendable earnings performance translated into an improved return on equity (ROE) of 38.5% after a decline during the previous financial year (FY2008: 34.7%; FY2007: 48.4%).

During FY2009, Handal generated cash of RM16.7 million from its operations, in line with increased business volume. Despite the higher cash flow from operations, debt service coverage declined slightly to 2.5 times at end-2009 from 2.8 times in the previous year. The decline was largely due to growth-related capital investments in fixed assets and the repayment of borrowings. Handal’s fixed assets doubled in FY2009 involving a cash outlay of RM15.2 million. Its repayment of borrowings amounted to RM7.5 million and includes a RM5.0 million repayment of the MTN facility.

MARC notes tightening in Handal’s liquidity position and increased working capital needs arising from its higher business volume in FY2009. Handal’s cash conversion cycle has lengthened to 234 days in 2009 from a more manageable level of below three months in 2005, mainly as a result of rising inventory levels.

Repayment of borrowings during 2009 improved Handal’s debt-to-equity ratio to 0.7 times. Handal’s gearing level peaked at 1.5 times in 2007, the year the MTN was issued, and have been declining since.

Going forward, MARC expects Handal’s existing operations to exhibit stable earnings performance. MARC believes that Handal’s ability to manage the incremental risk associated with its regional strategy and to prudently manage its working capital and capital spending will remain key to its future credit strength.

Contacts:
Anandakumar Jegarasasingam 03-2082 2250/ kumar@marc.com.my;
Taufiq Kamal 03-2082 2251/ taufiq@marc.com.my;
Eric Chua 03-2082 2245/ cheekiong@marc.com.my.