MARC expects some pressure on financial performance over the near term as new LNG deliveries will be chartered at prevailing charter rates
KUALA LUMPUR: Malaysian Rating Corporation Bhd (MARC) expects MISC Bhd
's business growth over the next five years to be underpinned by the liquefied natural gas (LNG) and petroleum shipping as well as offshore business.
It said on Wednesday that for 2016, revenue from LNG shipping fell 11.5% to RM2.481bil due to a smaller operating fleet size and lower charter rates on new contracts which are expected to remain soft amid a global oversupply of LNG vessels.
“MARC expects some pressure on financial performance over the near term as new LNG deliveries will be chartered at prevailing charter rates,” it said.
The rating agency said MISC's revenue from the group’s petroleum shipping segment had remained flat at RM4.755bil, due in part to the stronger US dollar against the Ringgit.
MISC’s offshore segment, however, has remained steady supported by long-term fixed charter rates with an average contract tenure of 11 years.
For 2016, revenue from this segment increased by 6.4% to RM1.159bill supported by the consolidation of Gumusut-Kakap Semi-Floating Production System (L) Ltd's (GKL) revenue since May 2016.
MARC had affirmed its AAAIS rating on MISC's RM2.5bil Islamic medium-term notes (IMTN) programme. The outlook on the rating was stable.
“The affirmed rating reflects a three-notch rating uplift from its standalone rating based on MARC’s assessment of significant operational and financial integration with parent Petroliam Nasional Bhd (Petronas) on which the rating agency maintains a AAA/stable rating,” it said.
MARC pointed out MISC’s role as a key provider of shipping services for Petronas’ liquefied natural gas (LNG) shipping segment underscored the relationship between parent and subsidiary.
MISC’s standalone credit profile is well-supported by the stable revenue stream generated from sizeable long-term liquefied natural gas (LNG) and offshore contracts as well as its strong liquidity and low leverage position.
The rating agency pointed out MISC's fleet size of 123 vessels and 14 offshore floating facilities as at end-December 2016, has enabled the latter to maintain a key position in the LNG and petroleum shipping segments as well as in the offshore business segment.
“Notwithstanding these strengths, MISC’s business profile remains susceptible to the vagaries of the oil and gas sector,” it noted.
In 2016, MISC merged its chemicals segment with the petroleum business segment and divested its logistics arm to further streamline its business portfolio.
This also included acquiring the remaining 50%-equity interest in Gumusut-Kakap Semi-Floating Production System (L) Ltd (GKL) from a related company for about RM1.9bil (US$445mil).
Following the acquisition, GKL is expected to contribute an additional RM200mil per year to the group’s earnings.
MISC also took delivery of two LNG vessels, Seri Camelia in September 2016 and Seri Cenderawasih in January 2017 and is expected to take delivery of three more vessels, one in 2H2017 and two in 2018.
“MARC understands that these vessels have secured long term-contracts,” it said.
Commenting on the financial performance in 2016, it said on a consolidated basis, MISC's revenue fell 12% on-year to RM9.6bil.
In addition to a smaller fleet of vessels and softer charter rates, its performance was affected by the fewer and lower value of projects in progress in its heavy engineering business segment, which is undertaken by subsidiary Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE).
MISC’s pre-tax profit rose by 9.6% on-year to RM2.8bil, largely due to RM365mil in compensation received on early termination of two LNG vessels, RM250.8mil on reversal of provision for a legal suit and RM847.3mill in net gain on acquisition of GKL.
Excluding these one-off items, MISC’s pre-tax profit would be 14.3% on-year lower at RM2.2bil.
“Its performance has also been affected by continued losses incurred by MMHE, which faces challenges in replenishing its order book,” it said.
MMHE registered a pre-tax loss of RM134.6mil in 2016 due to impairment charges recorded during the year.
MARC said MISC group’s consolidated cash flow from operations (CFO) and free cash flow (FCF) stood at a healthy RM5.2bil and RM1.4bil as at end-2016 respectively (end-2015: RM3.4bil; RM307mil).
“Going forward, FCF would be supported by the group’s lower capex projections for the next five years.
“Although its leverage position rose to 0.32 times from 0.18 times as at end-2015 upon consolidation of GKL’s total borrowings of RM4.6bil, its debt-to-equity level remains well within its standalone rating threshold. MISC maintains a strong liquidity position with cash equivalents of about RM6.6bil.
“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 ratings could be affected by any weakening in its credit profile,” said MARC.
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