MARC has affirmed its AAA_IS rating on MISC Berhad's (MISC) RM2.5 billion Islamic Medium-Term Notes (IMTN) programme. The outlook on the rating is stable. Currently, there is no outstanding amount under the IMTN programme.

The affirmed rating incorporates rating uplift from MISC’s standalone rating based on MARC’s assessment of MISC’s significant operational and financial integration with its parent PETRONAS. MISC’s role as a key provider of shipping services for PETRONAS’ liquefied natural gas (LNG) underscores the relationship between parent and subsidiary. PETRONAS carries a public information rating of AAA/stable from MARC. MISC’s standalone credit profile is mainly driven by stable revenue generation from sizeable long-term LNG and offshore contracts, strong liquidity and a moderate leverage position. These strengths are moderated by MISC group’s high susceptibility to the prospects of the oil and gas (O&G) industry.

MARC notes that MISC has continued to divest non-core businesses to focus on its four key business segments: LNG shipping, petroleum shipping, offshore and heavy engineering businesses. Among the divestments was its tank terminal business in 2017, which had minimal impact on MISC’s revenue. The group has also added three new LNG vessels to its fleet since September 2016 and will take delivery of another two in 1H2018. MARC understands that these vessels have secured long-term contracts, which will add to MISC’s existing long-term contracts in its LNG shipping and offshore business segments to strengthen revenue generation.

For financial year ended December 31, 2017, MISC’s consolidated revenue rose by 4.6% y-o-y to RM10.0 billion, mainly due to higher contribution from the LNG shipping and offshore business segments. Revenue was moderated by the weaker performance of its petroleum shipping segment and lower value of projects in progress in its heavy engineering business segment. MISC’s adjusted consolidated pre-tax profit increased by 16.1% to RM2.6 billion from RM2.3 billion in 2016 (excluding a RM823.5 million gain on acquisition of Gumusut-Kakap Semi-Floating Production System (L) Ltd (GKL) and other one-off items).

The performance of the LNG shipping segment has improved, with revenue increasing by 14.1% y-o-y to RM2,831.9 million mainly on the commencement of charter for the three new vessels and deferred revenue recognition on a contract related to Yemen LNG. However, operating profit declined by 4.7% y-o-y to RM1,422.3 million due to asset impairments. For the offshore segment, revenue increased significantly by 63.5% to RM1,896.1 million, largely driven by the full year consolidation of GKL. The higher revenue was also supported by the increased charter rate of GKL as a result of variation orders secured through the favourable outcome of a previous adjudication.

The petroleum business segment, however, continued to be affected by a glut in petroleum tankers, leading to compressed charter rates. This is reflected in a 5.1% y-o-y decline in revenue to RM4,511.7 million and lower operating profit of RM46.9 million for 2017. The operating performance of the petroleum business segment will continue to be pressured in the next 12 months as tanker oversupply will keep a lid on rates through 2018. MISC’s key subsidiary, Malaysia Marine and Heavy Engineering Holdings Berhad (MHB), which is mainly involved in the offshore fabrication sector, turned profitable in 2017 with a pre-tax profit of RM11.0 million. MHB secured a major contract worth RM1.1 billion in 2017, pushing its order book to RM1.3 billion, a twofold improvement from RM629.0 million as at end-2016.

MISC’s consolidated cash flow from operations (CFO) remained healthy despite declining marginally to RM5,151.4 million in 2017 (2016: RM5,222.3 million). Free cash flow (FCF) was negative RM750.3 million mainly on a sharp increase in capex to RM4,006.0 million (2016: RM2,403.0 million) to fund the company’s recent vessel acquisitions and construction. Liquidity position has remained strong, with a cash balance of RM5.9 billion as at end-2017. MISC has continued to maintain a moderate debt-to-equity ratio, which stood at 0.32 times as at end-2017.

The stable rating outlook reflects MARC’s expectation of continued parental support from PETRONAS. Any weakening in MISC’s importance to PETRONAS would prompt a reassessment of the likelihood of parental support. Additionally, its standalone rating could be affected by the weakening of its credit profile.

Contacts:
Joan Leong, +603-2717 2934/ joan@marc.com.my,
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.