MARC Ratings has affirmed its rating of AA-IS on MMC Corporation Berhad’s (MMC) RM2.5 billion Sukuk Murabahah Programme with a stable outlook. Total outstanding under the programme stood at RM2.1 billion as of October 31, 2022.
MMC’s significant and longstanding competitive strengths through subsidiaries and associates in the ports and logistics, engineering, and energy and utilities divisions that have translated into strong dividend-paying capabilities remain key rating drivers. The key moderating factor is its high leverage position resulting mainly from the issuance of a RM2.94 billion hybrid instrument as part of a privatisation exercise completed in December 2021.
MMC is an operating holding company with three key divisions: ports and logistics, engineering, and energy and utilities. For 1H2022, the group recorded 3.1% higher revenue y-o-y to RM2.4 billion but lower pre-tax profit of RM463.5 million from RM493.6 million due to higher fuel costs at the ports. The slight increase in revenue was primarily due to higher conventional cargo volume handled at its Northport, and higher port tariffs at its Penang Port and Johor Port from October 1, 2021.
For 1H2022, MMC’s ports overall recorded 17.9 million freight weight tonnes (FWT) of conventional cargo, partly offsetting the decline in container throughput volume to 7.9 million twenty-foot equivalent units (TEU) (1H2021: 17.5 million FWT; 8.5 million TEUs). The container throughput volume was affected by China’s strict pandemic-related measures which led to disruption in liners’ schedules. For its engineering division, outstanding construction order book stood at RM581 million as at end-June 2022 as its key projects — the Klang Valley Mass Rapid Transit (KVMRT) Line 2 and Langat Sewerage — are reaching their tail end. MARC Ratings expects MMC to replenish its order book based on the group’s demonstrated capability in undertaking key infrastructure projects in the country. In addition to tendered contracts worth RM2.5 billion, MMC also recently participated in the tender for the KVMRT Line 3 project.
MMC continues to benefit from steady performance of its energy and utilities associates, namely Malakoff Corporation Berhad and Gas Malaysia Berhad. Malakoff has an effective generation capacity of 5,836MW in Malaysia (or about 22% of total generation in Peninsular Malaysia), comprising six power plants through five subsidiaries and a 40%-owned associate. Gas Malaysia is an investment holding company whose subsidiary owns, develops, operates, and maintains a distribution pipeline for the delivery of gas under a 20-year licence ending January 2040.
At the holding company, revenue comprises construction receivables and dividends. Construction receivables declined from RM1.4 billion to RM878.5 million between 2018 and 2021 as major projects are nearing completion. Meanwhile, dividends have doubled from RM294.0 million to RM647.5 million during the same period, supported by a sharp rise in contribution from the engineering division (namely from KVMRT Line 2), and the ports and logistics division (namely from its Northport and Pelabuhan Tanjung Pelepas).
Total borrowings at the holding company declined marginally to RM2.7 billion as at end-2021 (end-2020: RM2.8 billion), but overall this has substantially decreased from RM3.6 billion as at end-2018. In tandem with the decline, finance cost has declined sharply to RM151.4 million from RM195.0 million. Of the total borrowings, maturing short-term loans comprise RM55 million term loan, and RM100 million sukuk that the company expects to redeem when it matures in April 2023. Its cash balance at the holding company of about RM1.3 billion and expected dividends would be sufficient to meet the maturing borrowings.
Adjusted total borrowings of RM3.5 billion includes the 25% debt portion of the RM2.94 billion hybrid instrument issued to shareholder Seaport Terminal (Johore) Sdn Bhd as part of the privatisation exercise. MARC Ratings has accorded a 75% equity credit to the instrument under its methodology. We expect the company to manage distribution on shareholder’s advance (the hybrid instrument) and upstreaming of dividends in line with its financial obligations.