RAM Ratings reaffirms AAA(s) rating of Muhibbah’s Islamic bonds

KUALA LUMPUR: RAM Ratings has reaffirmed the AAA(s) rating of MUHIBBAH ENGINEERING (M) BHD []’s (Muhibbah) RM130 million Islamic Bonds with a stable outlook.

In a statement Thursday, July 7 the rating agency said the AAA(s) rating was supported by the irrevocable and unconditional guarantee from Maybank, to honour Muhibbah’s irrevocable and unconditional undertaking to purchase and cancel all the Islamic Bonds at the exercise price upon the declaration of an event of default.

“The trustee, on behalf of the bondholders, will be able to call on the bank guarantee to honour Muhibbah’s Purchase Undertaking.

“The guarantee from Maybank enhances the credit profile of the Islamic Bonds beyond Muhibbah’s inherent or stand-alone credit standing,” it said.

Muhibbah is principally involved in CONSTRUCTION [], crane manufacturing and shipbuilding.

The group also has associate stakes in a Malaysian road-maintenance concessionaire, and an operator as well as concession holder of 3 international airports in Cambodia.

RAM Ratings said that excluding the bank guarantee, Muhibbah’s credit profile was underpinned by its established track record within the construction industry, specialising in oil-and-gas-related jobs, as well as marine-engineering and civil-engineering works.

It said Muhibbah’s outstanding order book of RM2.9 billion as at May 19, 2011 should sustain it through the next two years.

“Looking ahead, the group is deemed well poised to secure some expected jobs amid the brighter prospects of the local construction sector and the anticipated uptick in domestic oil and gas (O&G) activities.

“Muhibbah also derives earnings diversity from its involvement in cranes and shipyards, and enjoys recurring dividend income from its associates,” it said.

Nevertheless, RAM Ratings said Muhibbah’s credit profile had been affected by its weaker-than-expected profit performance, balance sheet and debt coverage, not to mention its tight liquidity.

Its margin on operating profit before depreciation, interest and tax has also been narrowing in recent years, compared to 6.73% in fiscal 2007, it said.

The rating agency said that given the competitive operating environment for the construction and O&G sectors, Muhibbah’s ability to earn healthier margins for future jobs remains to be seen.

“The group also faces collection issues, including a large sum for a petroleum-hub project in Johor.

“All said, the group is exposed to the cyclical nature of the construction and O&G sectors, and foreign-exchange risk from its overseas operations,” it said.