MARC has affirmed its AAAID rating on MISC Berhad's (MISC) RM2.5 billion Islamic Medium-Term Notes (IMTN) programme. The outlook on the rating is stable. The rating incorporates significant rating uplift from MISC’s standalone credit profile based on the rating agency’s assessment of very strong parental support from Petroliam Nasional Berhad (PETRONAS). In assessing parental support, MARC has considered the operational integration between the companies with MISC serving as a major LNG shipping provider to PETRONAS and the parent’s demonstrated support in extending capital and liquidity to its subsidiary. PETRONAS has a public information rating of AAA/Stable from MARC based on the national oil company’s significant credit strength which is derived mainly from its dominant position in the domestic oil and gas industry, global-wide integrated operations and strong financial position.

MISC’s standalone rating reflects the current challenging conditions in the oil and gas transportation industry, beset by pressure exerted by excess vessel supply and lower charter rates. The group credit profile is, however, supported by strengthening balance sheet metrics. MISC operates a fleet of 119 vessels as at end-December 2014, of which 75% are owned, to undertake its shipping operations of LNG (27 vessels), petroleum (76 vessels) and chemical (13 vessels). MARC notes the number of vessels has continued to decline (end-2013: 128; end-2012: 138), mainly in the loss-making chemical shipping segment where another seven owned vessels have been earmarked for disposal over the near term, retaining only chartered-in vessels. The fleet optimisation measure is in response to the continued weak prospects for liquid bulk transportation of commodities in the chemical segment, which registered pre-tax losses of US$38.4 million in FY2014 (FY2013: negative US$44.8 million). While a smaller fleet base and disposal gains (FY2014: US$4.1 million) have narrowed losses in recent years, MISC has plans to exit from the segment when its final contract expires in 2018.

MISC’s struggling petroleum segment, however, recorded a sharp profit turnaround in the recent quarter, benefitting from the significant oil price decline in 4Q2014 which has led to a sharp increase in storage trades and higher freight rates. The improved performance narrowed losses for the segment to US$23.7 million for the full FY2014 (FY2013: negative US$152.4 million). MARC expects higher earning days and freight rates, which has since abated from recent high levels, to support the segment’s near-term prospects. MISC’s key profitable segment continues to be LNG shipping, accounting for 30% and 72% of consolidated revenue and pre-tax profit at US$858.5 million and US$483.6 million in FY2014 (FY2013: US$844.1 million; US$462.6 million). The LNG segment remains heavily reliant on PETRONAS, which charters 23 of the 27 LNG vessels and accounts for about 90% of the segment’s revenue. The financial performance of the LNG segment remains susceptible to lower charter rates on new contracts or upon renewal of existing ones. Although the average remaining contract period for MISC’s LNG shipping is 8.8 years, the majority of its high-value contracts will expire between 2015 and 2017. These are likely to be renewed at lower rates given that the current market rates stand at US$60,567 per day for long-term charters of up to three years and US$73,081 per day for spot rate in February 2015.

MISC’s offshore segment generates steady recurring income from 14 operating floaters under long-term fixed rate charters with average tenures of 10 years. This segment registered a rise in pre-tax profit to US$162.3 million in FY2014 (FY2013: US$137.3 million), mainly from the commencement of the finance lease of FPSO Cendor in September 2014 and revised rates for FPS Gumusut-Kakap. MISC’s heavy engineering segment, undertaken by listed subsidiary Malaysia Marine and Heavy Engineering Holdings Berhad, has faced weakening profitability, partly from a declining order book. Any improvement in its near-term prospects would be largely linked to PETRONAS’ capital expenditure programme.

MISC is constructing five new vessels to meet the transportation requirements of the LNG complex in Bintulu, Sarawak, with delivery scheduled between September 2016 and December 2017. The construction of the new vessels will be funded through a mix of internally generated funds and debt. While the current moderate leverage position with a debt-to-equity ratio of 0.30x affords comfortable headroom for additional debt, the capex funding could potentially reverse the recent improvement in free cash flow (FCF) generation. For FY2014, MISC registered FCF of RM1,262.3 million (FY2013: RM213.8 million) on stronger cash flow from operations (CFO) of RM2,869.7 million (FY2013: RM2,011.2 million) and reduced capex of RM1,708.8 million (FY2013: RM2,271.3 million) which were incurred for two Dynamic Positioning shuttle tanker newbuilds that are expected to be delivered in 2Q2015. The group’s liquidity position remains strong with cash balance of RM4.8 billion as at end-FY2014.

The stable rating outlook on MISC reflects MARC’s expectation of continued support from PETRONAS. Any weakening in MISC’s importance to PETRONAS would prompt a reassessment of parental support probability. In addition, pressure on the rating would emerge on any weakening in MISC’s financial metrics to an extent that they are not commensurate with its standalone rating.   

Contacts:
Sonia Lim, +603-2082 2267/ sonia@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.