MARC has affirmed its rating of AAA(fg) on KMCOB Capital Berhad’s (KMCOB) guaranteed serial bonds (Guaranteed Serial Bonds) of up to RM320 million with a stable outlook. The rating and outlook are premised on the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin), which carries MARC’s insurer financial strength rating of AAA/stable.

As the funding vehicle of parent Scomi Oilfield Limited (SOL), KMCOB’s repayment capacity is fully dependent on the SOL group which is involved in providing drilling fluids (DF) and drilling waste management (DWM) services for the oil and gas industry. An indirect 65.7%-owned subsidiary of Scomi Group Berhad, SOL has an established market position domestically in the DF and DWM segments with a market share of 50% and 45% respectively. MARC notes that SOL has also been able to sustain its business profile on the back of an increased number of operational drilling rigs in Asia Pacific and the Middle East that offset the decline in domestic operating rigs. The group’s order book stood at US$1.61 billion as at end-June 2014, of which US$972.9 million or about 60.4% is domestic. SOL’s fairly large order book is expected to provide earnings visibility until 2017.

MARC also views SOL’s geographically diversified order book as able to reduce susceptibility to the oil majors’ capex spending in any one region. In the near term, SOL’s domestic business prospects in the DF and DWM segments should continue to be supported by PETRONAS’ planned capex programme to sustain oil production. MARC observes that SOL’s financial performance has steadily improved in recent years with higher profit generation, improved cash flow coverage and lower leverage levels.

For the financial year ended March 31, 2014 (FY2014), revenue and pre-tax profits increased by 20.8% and 44.7% respectively to US$330.9 million and US$35.1 million from the annualised 15-month financial period ended March 31, 2013 (FP2013: US$342.4 million; US$30.4 million). The improved performance benefited from overall higher topline and cost containment efforts as well as higher margin in SOL’s operations in Russia and West Africa which offset the weaker performance in Malaysia. SOL’s Malaysian operations accounted for 23.2% and 27.5% of revenue and pre-tax profits respectively in FY2014. Cash flow from operations (CFO) stood higher at US$44.3 million in FY2014 compared to US$20.9 million in FP2013, primarily supported by the increase in earnings but moderated by higher working capital requirements. With capex spending remaining flat at US$16.7 million in FY2014 (FP2013: US$20.3 million), free cash flow (FCF) rose to US$27.8 million (FP2013: US$3.5 million). SOL’s CFO interest and debt coverage ratios improved to 6.47x and 0.26x respectively as at end-FY2014 (FP2013: 2.39x and 0.09x respectively).

As at end-FY2014, MARC notes a further moderation in SOL’s leverage position as reflected by the lower debt-to-equity (DE) ratio of 0.80x (FP2013: 0.89x, FY2011: 1.63x) and net DE ratio of 0.58x (FP2013: 0.78x, FY2011: 1.35x). SOL’s cash balances are sufficient to meet the upcoming debt payments of RM85 million in December 2014 under the rated programme. MARC expects the recent improved operating performance and cash flow generation to be sustained in the near term. This would support SOL’s capex requirements and debt repayment obligation over the next 12 months.

Nonetheless, as the rating and outlook hinges on the irrevocable and unconditional guarantee provided by Danajamin, any changes on KMCOB’s rating will be primarily driven by a revision of Danajamin’s credit strength.   

Contacts:
Oo Chin Kai +603-2082 2260/ chinkai@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.