MARC has affirmed its AAA_(fg) rating on KMCOB Capital Berhad’s (KMCOB) 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.

KMCOB is the funding vehicle of its parent Scomi Oilfield Limited (SOL), which mainly provides drilling fluids (DF) and drilling waste management (DWM) services for the oil and gas industry. KMCOB’s repayment capacity therefore hinges on the business and financial strength of SOL, a direct wholly-owned subsidiary of Scomi Energy Services Bhd (SESB) and an indirect 65.7%-owned subsidiary of Scomi Group Bhd. SOL remains well established in the DF and DWM segments with a domestic market share of around 40% in both. Domestic contracts accounted for 59.4% or US$988.3 million of SOL’s US$1.67 billion order book as at end-March 2015 (FY2015). However, SOL’s order book growth has remained flat (end-June 2014: US$1.61 billion) amid prevailing challenging conditions in the oil industry.

MARC expects SOL’s Malaysian operations to come under pressure following PETRONAS’ decision to cut capex spending and reduce exploration and production (E&P) activities. Although SOL’s order book remains fairly large, contract execution could be delayed as has happened in past periods of weak oil prices. Nonetheless, MARC believes that SOL’s geographically diversified order book will mitigate some of the impact from slow domestic market conditions. The group expects to derive revenue growth from India and the Middle East region where drilling activities remain relatively strong notwithstanding the weak oil price environment.

For FY2015, SOL recorded modest revenue and profit growth of US$344.0 million and US$35.9 million respectively, with better performance in other Asian countries and the Middle East region offsetting the weaker performance domestically. Cash flow from operations (CFO) has remained strong at US$35.1 million in spite of a decline from US$44.3 million in FY2014, mainly on account of lower payables in the year. CFO interest cover stood at a healthy 4.28x as at FY2015. Given that SOL has had no major capital expenditure, free cash flow (FCF) has remained positive at US$21.6 million (FY2014: US$27.8 million).

MARC is of the view that SOL has an adequate buffer to withstand a moderate decline in earnings and be able to meet its financial obligations. As at end-FY2015, the group’s total borrowings stood at US$117.6 million (FY2014: US$141.9 million). Over the near term, SOL has a repayment of US$19.0 million (excluding revolving credit) and a planned capex commitment of US$17.0 million; it has cash balance of US$26.9 million as at end-FY2015. MARC notes that SOL wrote off US$85.7 million in FY2015, which was an amount due from its immediate holding company, SESB. This amount arose from a group-wide corporate restructuring in 2013. This resulted in the shareholders’ funds declining to US$102.5 million (FY2014: US$176.7 million), leading to a higher debt-to-equity ratio of 1.15x (FY2014: 0.80x).

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:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Neoh Jiun Yan, +603-2082 2263/ jiunyan@marc.com.my