MARC Ratings has assigned a corporate credit rating of AA- to Orkim Sdn Bhd with a stable outlook.
The rating reflects Orkim’s leadership position as the largest domestic vessel owner with 16 clean petroleum product (CPP) tankers and two liquified petroleum gas tankers, with an estimated 17% market share by fleet size as of June 2023. The rating considers its long track record of steady operating performance and earnings visibility from charter contracts; seven of its 18 vessels are on long-term contracts ranging from five to 10 years. The company maintains a healthy mix of long-term contracts that provide earnings visibility and short-term contracts that can benefit from potential hikes in charter rates. The rating also considers the high barrier to entry of the tanker transportation segment. Moderating the rating is Orkim’s high leverage position arising from continued capital requirement for vessel acquisitions, and contract renewal risk.
Orkim demonstrated a strong record of contract renewals and consistent utilisation rate of around 90% which mitigate contract renewal risk. This reflects Orkim’s capability and its longstanding relationships with key demand drivers, Petroliam Nasional Berhad and Shell Malaysia, since 2010. The rating agency believes that stronger economic activities will also deliver strong demand for CPP tankers and mitigate contract renewal risk. Orkim has nine charter contracts that will be up for renewal in less than one year. In the event the contracts are not renewed, tankers can be chartered out in the spot market until new contracts are secured. In 2022, revenue from spot charters constituted 13% of Orkim’s total revenue.
The rating agency views that Orkim has a strong sustainable market position as there are material barriers to entry into the fuel transportation sector, including (1) strict Health, Safety, Security and Environment (HSSE) requirements by oil majors; (2) stringent local regulations and licensing requirements including cabotage laws; (3) heavy reliance on operating track record and stability; and (4) limited financing support for new entrants.
Orkim’s seven long-term contracts have an estimated revenue backlog of RM843.5 million as of end-May 2023. This lends support to revenue visibility through 2032. Orkim’s revenue grew at a compound annual growth rate of 9.8% in the five years to 2022. Earnings before interest, tax, depreciation, and amortisation (EBITDA) margins were strong at above 45% except in 2021 when it fell to 36.8%, largely due to pandemic-related expenses. While Orkim’s major cost is fuel, movements in bunker fuel prices have limited impact on the company’s margin as there is a built-in adjustment mechanism to the base freight rates of the charter contracts.
The financing for five vessels acquired in 2021 for RM213.6 million saw debt-to-equity (DE) ratio increasing to 1.43x, before declining to 1.10x as at end-June 2023. Orkim’s plans to acquire seven new vessels between 2024 and 2026 for an estimated RM559.1 million would lead to higher borrowings in the medium term. Positively, however, vessel acquisitions are expected to come with locked-in contracts. Base case cash flow projections yield a minimum finance service cover ratio of 1.7x in 2024 and an average of 1.8x over a five-year forecast period through 2027. As regards the DE ratio, the rating agency expects leverage metrics to improve over the forecast period considering the company’s history of post-acquisition deleveraging through revenue and EBITDA growth.