Muhibbah’s Islamic bonds rating reaffirmed (5703)

PETALING JAYA: RAM Ratings has reaffirmed the AAA(s) rating of Muhibbah Engineering (M) Bhd’s RM130mil Islamic bonds.

“The enhanced long-term rating has a stable outlook,” said the ratings agency.

According to RAM Ratings, the AAA(s) rating is supported by the guarantee from AAA-rated Malayan Banking Bhd (Maybank), to honour Muhibbah’s undertaking to purchase and cancel all the Islamic bonds at the exercise price upon the declaration of an event of default.

RAM Ratings pointed out that the guarantee from Maybank enhanced the credit profile of the Islamic bonds beyond Muhibbah’s inherent or stand-alone credit standing.

Muhibbah is chiefly involved in construction, crane manufacturing and shipbuilding.

It also has associate stakes in a Malaysian road-maintenance concessionaire, and an operator as well as concession holder for three international airports in Cambodia.

Excluding the bank guarantee, Muhibbah’s credit profile is underpinned by its established track record within the construction industry, specialising in oil-and-gas (O&G)-related jobs, as well as marine and civil engineering works.

“Muhibbah’s outstanding order book of RM3.1bil as at July 2, 2012 should sustain it through the next two years,” said RAM Ratings.

The ratings agency said looking ahead, Muhibbah was deemed well-poised to secure sizeable jobs amid the brighter prospects of the local construction sector, as the industry witnessed the roll-out of the major projects under the Economic Transformation Programme, Budget 2011, and the 10th Malaysia Plan.

Muhibbah also derives earnings diversity from its involvement in the crane-manufacturing and shipyard sectors, and enjoys recurring dividend income from its associates.

However, it was noted that Muhibbah’s credit profile had been affected by its stretched balance sheet.

“The group’s gearing ratio has been gradually rising in recent years due to increasingly high borrowings to fund its working capital. Muhibbah’s balance sheet is also threatened by its seemingly dim prospects of recovery for the substantial receivable arising from the petroleum-hub project in Johor,” said RAM Ratings.

It was also pointed out that going forward, although Muhibbah stood to benefit from the bright outlook of the O&G sector given its niche expertise, the competitive operating environment for the construction sector would continue to exert a downward pressure on Muhibbah’s profit margins for future jobs.