Posted Date: August 27, 2021
MARC has affirmed its AA-IS rating on Malaysia Marine and Heavy Engineering Holdings Berhad’s (MHB) RM1.0 billion Sukuk Murabahah Programme with a stable outlook.
The key rating factors are MHB’s conservative balance sheet and strong liquidity position, as well as its strong competitive position as the largest domestic offshore fabricator. MHB’s rating also benefits from a one-notch uplift based on its status as a member of the Petroliam Nasional Berhad (PETRONAS) group and our view of continued business support from the group. The rating is moderated by the volatility in the contract flows that has an impact on its cash flow generation.
We note that the operational disruptions caused by the COVID-19 pandemic have recently delayed MHB’s construction works, resulting in slower revenue recognition in its key heavy engineering segment. The impact from the pandemic has also led to additional costs to expedite projects and substantial asset impairments. In its marine business segment, MHB faces challenges in securing foreign vessel contracts due to various restrictions, including a travel ban on foreign experts. These have all contributed to MHB posting pre-tax losses of RM401.3 million in FY2020 and RM141.8 million in 1H2021 and are expected to continue weighing on MHB’s operations and financial performance for the remainder of 2021.
Near-term financial risk is substantially mitigated by MHB’s strong liquidity position with cash and bank balances of RM625.0 million as at end-June 2021. MHB is also discussing with its key client on potential extensions of time for its existing heavy engineering projects and will be submitting variation orders for additional pandemic-related costs. As at end-June 2021, its heavy engineering order book stood at about RM2.7 billion, up from RM1.9 billion as at end-2020; it secured a RM1.1 billion engineering, procurement, construction, installation, and commissioning contract for the Jerun Development Project in 1Q2021. The contract provides earnings visibility until 2024.
MHB continues to maintain a conservative balance sheet, with total borrowings of RM319.4 million and a debt-to-equity ratio of 0.17x as at end-June 2021. Borrowing levels are not expected to increase as there are no further projects in the pipeline following the completion of its Dry Dock No. 3 for RM500.0 million in 2020. In the near term, our expectations are that the operational disruptions MHB has faced will be reduced as the pandemic measures are eased and the group’s credit profile will continue to be underpinned by a strategy of maintaining low leverage and strong liquidity position.