KUALA LUMPUR: RAM Ratings maintained its ratings of Mudajaya Corporation Bhd's debt notes as it expects the group’s profit performance to be better but it also kept the negative outlook on the long-term rating.
The rating agency had on Friday reaffirmed the A2/P2 ratings of Mudajaya Corp's Islamic medium-term note (MTN) programme (2014/2029) and Islamic commercial papers programme (2014/2021).
Mudajaya Corp is a unit of listed Mudajaya Group Bhd
and its credit profile reflects that of its parent.
“The reaffirmation is premised on the potential improvement in the group’s profit performance, backed by sustained order-book replenishment and the progressive completion of contracts in hand,” it said.
RAM said the conclusion of negotiations on Mudajaya’s variation order (VO) claims for its three earlier projects eliminated uncertainties and the risk of further impairments.
To recap, Mudajaya incurred substantial and larger-than-expected pre-tax losses of RM377.53mil in FY Dec 2016 and RM104.30mil in the nine months of FY17.
The losses were firstly due to impairments for its power-plant construction projects and a windfarm investment in the Philippines.
Secondly, there were additional costs of two of its older construction projects.
Thirdly, the group’s share of the losses of its India-based power asset under its 26%-owned associate, RKM Powergen Pte Ltd.
“Following capital erosion from such losses, its gearing ratio had worsened significantly to 0.83 times as at end-September 2017, from 0.56 times a year earlier.
“Excluding the impact of non-cash items, however, Mudajaya’s operating profit before depreciation, interest and tax (OPBDIT) leapt to RM59.5mil in 9M fiscal 2017 (9M fiscal 2016: RM12mil), driven by the stronger margins of its existing contracts and the reversal of impairment following the recovery of an insurance amount for the Tanjung Bin project.
“Accordingly, its annualised funds from operations debt coverage (FFODC, after adjusting for pledged cash) turned out better than expected at 0.14 times,” it said.
RAM also pointed out the conclusion of negotiations over Mudajaya’s VO claims for its three earlier projects had resulted in a substantial RM227mil impairment on its bottom line in both fiscal 2016 and 9M fiscal 2017.
However, Mudajaya received about RM157mil as settlement amounts and insurance claims for these projects last year.
Importantly, these events have also eliminated the uncertainties over its claims in respect of the 3 projects, which will involve no further impairment.
RAM also highlighted that Mudajaya continued to clinch jobs in 9M 2017, with about RM1.4bil of contracts to date. This eased concerns over order-book replenishment.
Mudajaya's outstanding order book was maintained at a robust RM2.7bil as at end-October 2017, which should sustain it over the next few years.
“Mudajaya’s top line and OPBDIT are anticipated to improve going forward, on the assumption of successful execution of contracts in hand.
“Consequently, its FFODC may hover at the current level over the next one to two years while its gearing ratio (excluding concession-related debts) could breach 0.9 times due to its smaller capital base and in the event of unsuccessful asset disposal.
“There is, however, upside potential to these metrics as the management plans to monetise non-core assets to pare down its borrowings.
“The negative outlook reflects the uncertainties over the group’s ability to sustain credit metrics that are commensurate with its A2/P2 ratings. Slow execution of secured contracts had resulted in lower-than-expected construction revenue in 9M FY Dec 2017 (-25% on-year).
“Its projected credit metrics are also still short of those required for its A2/P2 ratings.
“Moreover, the group could keep incurring its share of losses under RKM Powergen, given that it is still uncertain when power sales from the plant’s completed unit two will commence; units three and four are slated for completion in fiscal 2018,” said RAM.
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