PETALING JAYA: RAM Ratings expects UMW Holdings Bhd to emerge stronger after it exits the loss-making oil and gas (O&G) sector but cautions that any delays will erode its retained earnings.
The ratings agency had reaffirmed the AA2/Stable/P1 ratings of UMW’s Islamic debt programmes.
“Despite the group’s significant losses and impairments in financial year December 2016, the reaffirmation of the ratings is premised on the anticipated strengthening of its balance sheet and earnings, through corporate exercises that will see UMW exiting from the O&G sector.
“The completion of these corporate exercises will favourably alter the group’s financial profile and relieve it of the losses suffered by its O&G operations,” it said in a statement.
UMW expects the distribution of its entire shareholding in UMW Oil & Gas Corp Bhd (UMW O&G) and the substantial disposal of its unlisted O&G businesses to be wrapped up in the third quarter of 2017 and by year-end, respectively.
RAM head of consumer and industrial ratings Kevin Lim said: “As the debts of UMW O&G constituted nearly two-thirds of the group’s borrowings as at end-December 2016, UMW’s post-demerger balance sheet is envisaged to emerge stronger.
“The group’s debt load is estimated to come in at RM2.8bil by end-December 2017, with corresponding gearing and net gearing ratios of below 0.70 and 0.45 times, respectively.
“While UMW is exiting its O&G operations, we highlight that delays in the completion of this exercise and/or the mounting losses of these businesses will substantially erode its retained earnings, thereby weakening its financial profile,” Lim said.
The group’s ratings will likely face downward pressure if its efforts to exit from its O&G operations were to be shelved or significantly delayed.
There remain notable milestones to completion for the demerger exercise, while the disposal of the unlisted O&G businesses could take longer as the group has been on the lookout for potential suitors for a number of years.
Meanwhile, the recent termination of the proposed acquisition of Icon Offshore Bhd and Orkim Sdn Bhd by UMW O&G will have no impact on UMW’s demerger exercise.
In financial year December 2016, all of UMW’s divisions delivered poor performances, causing a 24.1% year-on-year decline in revenue to RM10.96bil and shrinking its operating profit before depreciation, interest and tax by 72.6% to RM236.87mil.
The group’s automotive division continued to face intense competition while its margins were compressed by higher imported costs, following the persistent weakness of the ringgit.
RAM said the losses of the group’s O&G segment deepened as the sector remained mired in one of the worst downturns in recent history.
Besides its poor operating performance, a hefty RM1.24bil of impairments and RM750mil of provisions relating to guarantees on the debts of a joint venture in O&G operations had led to UMW reporting a bruising RM2.13bil pre-tax loss in fiscal 2016.
Given the substantial erosion of its shareholders’ equity and a heavier debt burden of RM6.36bil as at end-December 2016, the group’s adjusted gearing ratio deteriorated to 0.94 times (end-December 2015: RM6.01bil and 0.65 times).
The impairments were larger than estimated while the provision was also unexpected, resulting in a weaker balance sheet.