MARC has affirmed its AA-IS rating on MMC Corporation Berhad’s (MMC) RM2.5 billion Sukuk Murabahah Programme with a stable outlook.
MMC’s significant competitive strengths in the ports and logistics, and engineering segments that have translated to strong earnings generation remain key rating drivers. The group’s performance is further supported by steady earnings from its energy and utilities segment. Key moderating factor is the group’s relatively high leverage position following a recent privatisation exercise.
We note under the privatisation exercise, Seaport Terminal (Johore) Sdn Bhd has assumed 100% control of MMC through selective capital reduction of RM2.94 billion. The group has restored its equity base via an issuance of a hybrid instrument of an equivalent amount to which MARC has provided a 75% equity credit under its methodology. Its leverage post-privatisation would be about 1.0x (pre-privatisation: 0.89x). We also note that there is no change in MMC’s corporate structure post-privatisation.
MMC’s ports and logistics division has benefited from a rebound in trade activities, surge in pent-up demand and global port congestion since 2H2020. Combined container throughput volume at its ports for 1H2021 was significantly higher at 8.5 million twenty-foot equivalent units (TEUs) (1H2020: 7.0 million TEUs). Revenue has accordingly rose 19.3% y-o-y to RM1.8 billion. We view that growth momentum will remain in the near term on the back of expected economic recovery.
For its engineering segment, revenue declined 11.4% y-o-y to RM448 million due to lower work progress from KVMRT Line 2 and Langat Sewerage projects which are nearing completion. The key ongoing project, KVMRT Line 2 is expected to be completed by January 2023. The group has near-term earnings visibility, mainly from construction order book of RM1.8 billion as at end-June 2021, but on a longer term, its performance would hinge on securing tendered projects worth about RM2.7 billion, supported by potential internal projects worth about RM400 million. We view MMC has proven capabilities to be able to secure major infrastructure projects on the back of improved prospects for the construction industry.
Its energy and utilities division is driven by its two associate companies: Malakoff Corporation Berhad and Gas Malaysia Berhad, performance of both have remained steady. This largely reflects the companies’ entrenched position in their respective businesses supported by tariff structures. The two entities have collectively upstreamed annual dividends of between RM97 million and RM166 million over the past three years.
For 1H2021, group revenue increased 10.4% y-o-y to RM2.3 billion and pre-tax profit by twofold y-o-y to RM494 million, underpinned by strong performances of its ports, namely Pelabuhan Tanjung Pelepas and Northport. Correspondingly, operating profit margin improved to 27.4% (1H2020: 21.5%). As at end-June 2021, total borrowings stood at RM9.5 billion (end-2020: RM9.8 billion). At the operating holding company level, dividend income and steady earnings from construction activities remained supportive of finance servicing obligations on borrowings of RM2.8 billion as at end-2020. Including earnings from construction operations, the holding company generated cash flow from operations of RM1.0 billion, which provided an interest coverage ratio of 6.24x in 2020. MMC’s cash balance of RM2.3 billion as at end-June 2021 provides liquidity, supported by unutilised credit facilities of approximately RM2.1 billion and proceeds from potential sale of about 105 acres in Senai Airport City.
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