Moody's: MISC Q1 results softer but in line with our expectations

Moody's Investors Service says that the results of MISC Berhad ("MISC") for the quarter ending March 2013 were slightly lower than the quarter ending December 2012 but were in line with its expectation and support the company's Baa2 issuer ratings.
For the quarter ending March 2013, MISC reported a marginal 2.3% increase in its revenue from the December quarter mainly due to increase in revenue of in its heavy engineering business.
However, recurring or core EBITDA from continuing operations for the quarter $240.1 million was lower than $267.7 million achieved in the quarter ending December 2012. This decline was mainly due to lower contribution from the LNG segment which recognized pre operating costs for the 2 FSUs and higher cost incurred from vessel dry docking and repairs.
Nonetheless, the core EBITDA for the quarter did improve by 21% from $198.9 million for the corresponding quarter last year as bunker prices declined by about 3.5% on average and losses in chemical and petroleum segments declined.
"MISC's performance should improve in the next few quarters as the company completes the construction of its Gumusut project in July 2013 and the charter rates for its vessels -- especially in petroleum segment- stabilize towards the end of the year" says Vikas Halan, a Moody's Vice President and Senior Analyst.
MISC's reported gross debt as of March 2013 -$2.9 billion- declined marginally by $63.5 million from December 2012, whereas net debt increased by 15% to $1.9 billion, as cash balance declined by 24% to $985 million.
MISC's credit metrics continues to improve. Unadjusted debt to recurring EBITDA for the last twelve months ending March 2013 has reduced to 2.7x from 3.0x in 2012 and 4.3x in 2011.
"Although the buyout offer from its parent Petronas did not succeed, it reinforces its close business links with, and strong parental support for, MISC, both of which are key credit strengths that provide a three-notch uplift included in MISC's current Baa2 rating" adds Halan, who is also the lead analyst for MISC at Moody's.
The stable outlook reflects Moody's expectation that the company will not undertake any major debt-funded capital expenditure over the next two to three years, which increases its business risk and that its credit metrics will remain within the tolerance level for its ratings.
Moody's would consider upgrading the rating over the long term if the charter rates improve and MISC's profitability increases such that its operating lease adjusted debt/EBITDA falls below 5.0x and EBIT/interest exceeds 2.5x on a sustained basis.
Moody's would consider downgrading the rating if: (1) MISC's financial profile deteriorates as a result of further pressure on its profit margins from a protracted weakness in the shipping market; or (2) MISC significantly increases its capital expenditure and funds it using debt, such that its credit metrics weaken.
Negative free cash flow over a prolonged period of time, along with debt/EBITDA of above 6.0x or EBIT/ interest of below 1.5x would pressure the rating.
The principal methodology used in this rating was Global Shipping Industry Methodology published in December 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
MISC was established in 1968 as a liner company and was listed on the Kuala Lumpur Stock Exchange in 1987. In 1998, it became a subsidiary of Petroliam Nasional Berhad ("Petronas"). It is the exclusive transporter of liquefied natural gas for Petronas and provides it with logistics solutions.
Source: Moody's Investors Service