MARC has maintained its AA-_IS rating with a stable outlook on MMC Corporation Berhad’s (MMC) RM1.5 billion Sukuk Murabahah Programme following its assessment on the impact of the debt-funded acquisition of NCB Holdings Berhad (NCB) on the group. MARC’s rating action has taken into account MMC’s deleveraging plan over the near term to address the spike in group borrowings and leverage levels. In addition, the rating agency has incorporated the potential benefits the group will derive from the NCB acquisition.

The NCB acquisition will cost RM1.1 billion for a 53.4% stake and a potential RM340 million for the remaining 16.5% through a mandatory general offer. MMC’s existing stake of about 30.1% in NCB was acquired using internally generated funds of RM495 million. The additional stakes in NCB will be entirely funded by bank borrowings, increasing the group’s consolidated debt to about RM9.0 billion from the current RM7.1 billion (including NCB’s existing debt of RM464 million). The acquisition will potentially increase MMC’s consolidated gearing ratio to about 0.94 times from the current 0.74 times.

MARC notes that the NCB acquisition is cash accretive, given its ability to generate annual operating cash flows of about RM200 million via its wholly-owned subsidiary Northport (Malaysia) Bhd (Northport). The cash flow generation is sufficient to meet the combined estimated RM100 million servicing costs of NCB’s existing debt and MMC’s new borrowings which were taken to fund the acquisition. Over the near term, MMC could rationalise NCB’s loss-making logistics subsidiary Kontena Nasional Berhad to strengthen NCB’s overall credit profile. MARC expects the rationalisation process, which could include disposal of land parcels currently owned by NCB, to generate RM300 million that can be used to pare down group borrowings. Together with the proceeds from the group’s confirmed land disposals in Senai Airport City of about RM300 million and scheduled debt repayments, MARC estimates that the group gearing and net gearing ratios could improve to about 0.83 times and 0.70 times respectively over the near term.

MARC also regards the NCB acquisition to further strengthen MMC’s position as the largest domestic container terminal operator. However, Northport has been hampered by low utilisation of its port capacity which MMC is expected to address by streamlining current processes, improving operating efficiencies and implementing cost-saving measures. In addition, Northport’s performance will improve following the tariff hike of about 15% on container handling charges from November 1, 2015 onwards. The rating agency is in the midst of completing its annual review of Northport’s RM1.5 billion sukuk programme (currently rated AA-IS/Stable). Over the medium term, MMC has indicated that it plans to undertake an initial public offering of its combined port operations which also include Johor Port Berhad and Pelabuhan Tanjung Pelepas Sdn Bhd, the proceeds of which will be used to significantly reduce total group borrowings.

The stable rating outlook underpins MARC’s expectation that MMC will exercise financial discipline such that its credit metrics are in line with the current rating band. However, should MMC’s financial metrics weaken more than expected, the rating would be lowered.

Contacts:
Saifuruddin Othman, +603-2082 2245 / saifuruddin@marc.com.my,
Taufiq Kamal, +603-2082 2251 / taufiq@marc.com.my.