CIMB Research:
KUALA LUMPUR: Moody's Investors Service has affirmed the Baa2 issuer rating of MISC Bhd
and expects the liquefied natural gas (LNG) carrier’s operating performance to improve in 2019.
The international rating agency expects recent vessel additions in MISC's LNG, offshore and tanker segments, coupled with gradually improving market conditions, to support the firmer operating outlook.
A Moody's vice president and senior credit officer Brian Grieser said: “Earnings and cash flows are expected to be more resilient than industry peers in 2018-19, given MISC's exposure to long-term charter contracts, particularly in its LNG and offshore businesses.”
In the first half of 2018, MISC’s revenue from charter contracts was between 65% and 70% of total revenue and substantially all of MISC's profitability was generated by vessels on long-term charter contracts in the LNG and offshore segment.
Both the tanker and heavy engineering segments generated operating losses in the first half of the year that weighed on MISC's margins and cash flows.
Moody’s said despite the challenging end-market conditions, MISC continues to strategically invest in new vessels that will both rejuvenate the fleet and increase the tanker segment's exposure to long-term contracts, including the two Aframax's and six DP tankers in its current orderbook.
“Moody's expects this rebalancing to the fleet and charter portfolio to improve MISC's business profile over the next 12-18 months,” he said.
On the Baa2 issuer rating, Grieser said it balances MISC's operational alignment with its parent Petroliam Nasional Bhd (Petronas, A1 stable), its conservative financial policies and increasing exposure to long-term charters in its tanker and offshore businesses against its exposure to the highly volatile oil and gas shipping sector, which is currently pressuring MISC's earnings and cash flows.
“Despite industry headwinds, MISC's credit profile remains solid with debt/EBITDA of 3.1 times, EBIT/interest coverage of 7.0 times and cash balances of RM5.2bil at June 30, 2018.
Moody's expects a modest deterioration in the company's credit metrics in the second half of 2018 and early 2019, with debt/EBITDA peaking at 3.5 times to 4.0 times and EBIT/Interest weakening to around 5.0 times,” he said.
MISC's Baa2 issuer rating incorporates a two-notch uplift that reflects Moody's expectation that Petronas will provide extraordinary support to MISC in a distress scenario, given the close integration between the two companies and a track record of support.
The stable outlook reflects Moody's expectation MISC's moderate leverage and high cash balances will provide a buffer against earnings pressure stemming from challenging market conditions in the LNG, tanker, offshore and heavy engineering businesses over the next 12 months.
The ratings could be upgraded if charter rates and MISC's profitability begin to increase such that EBIT margins are maintained at or above 25%, its adjusted debt/EBITDA remains below 3.5 times and RCF/debt remains around 30%, all through the oil and gas shipping industry cycle.
However, downward rating pressure may emerge if (1) the company's financial profile deteriorates owing to further pressure on its profit margins because of protracted weakness in the LNG, tanker or offshore shipping markets; or (2) there are any changes in its relationship with Petronas that would weaken support for MISC.
Specific indicators that would result in a downgrade include (1) MISC embarking on a higher-than-expected debt-funded capital spending plan, such that its credit metrics weaken, as illustrated by persistent negative free cash flow; or (2) the company's debt/EBITDA increasing above 4.5 times or EBIT margins sustained below 15%, all through the oil and gas shipping industry cycle.
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