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Press Release
08 Sep | Monday
RAM Ratings assigns top rating to MAHCO Malaysia’s debt issue

RAM Ratings has assigned a preliminary enhanced rating of AAA(s)/stable to MAHCO Malaysia Sdn Bhd’s proposed IMTN Programme of up to RM300.0 million (2014/2019) (IMTN or Sukuk). The rating reflects the unconditional and irrevocable guarantee extended by Retaj Al Balad Al Ameen Company to meet MAHCO Malaysia Sdn Bhd’s obligations in respect of the Sukuk. This enhances the credit profile of the IMTN beyond the issuer’s stand-alone credit strength.

MAHCO Malaysia Sdn Bhd was set up by Mohammad Othman Al Houkail Trading & Contracting Company (MAHCO or the Group), a medium-sized contractor in Saudi Arabia, as a funding conduit to issue the Sukuk. The purpose of the proposed issuance is mainly to raise working capital required for the construction of a staff housing project in Makkah, Saudi Arabia (the Project), for Retaj Al Balad Al Ameen Company – a wholly-owned subsidiary of Al Balad Al Ameen Development and Urban Regeneration Company (or ABAM), which is in turn 100% owned by the Holy Makkah Municipality. ABAM was established in 2009 by royal decree to implement the Makkah Development Plan (MDP) to modernise the holy city’s infrastructure, while Retaj Al Balad Al Ameen Company’s primary objective is to develop residential complexes that cater to workers in the hospitality sector in the Makkah region.

The credit profile of Retaj Al Balad Al Ameen Company, the guarantor, is underpinned by its importance to ABAM, in view of the latter’s 100% shareholding in the former; decisions on financial, strategic and administrative matters are made by ABAM’s board of directors. In turn, ABAM enjoys very strong support from Saudi Arabia’s (Saudi or the Kingdom) government, given its strategic role in implementing the MDP. Further, the Municipality, which wholly-owns ABAM, is viewed as an extension of the Saudi Government and is not financially and administratively independent. Makkah is of significant religious and economic importance to Saudi Arabia, as it is home to the holiest site of Islam and attracts millions of Muslim pilgrims annually. ABAM and Retaj Al Balad Al Ameen Company are funded by the Saudi Government through budget appropriations from the Ministry of Finance. Hence, both entities are viewed as dependent Government-Linked Entities (GLE) of Saudi Arabia (as defined under RAM’s criteria for rating GLE), and their credit profiles reflect that of the Kingdom’s.

Excluding Retaj Al Balad Al Ameen Company’s guarantee, MAHCO’s stand-alone credit profile is moderated by heightened execution risk as a result of a drastic increase in its order-book size to an unprecedented amount of more than SAR2 billion. The sheer scale of the housing project also amplifies the concentration risk that MAHCO faces, as the Project accounted for almost half of the Group’s order book as of March 2014. In addition, MAHCO’s balance sheet will weaken in the near term as it issues the Sukuk to fund working capital for the Project; its gearing ratio is expected to reach more than 1 time.

On a positive note, we believe MAHCO will continue to benefit from various government-led developments in Saudi Arabia, on account of its strong government ties and wide-ranging contracting services. The Group’s OPBDIT margins have averaged a strong 25% to 40%, largely underpinned by its highly-profitable government contracts and equipment rental business. With strong profit margins and a somewhat favourable operating cash cycle, MAHCO boasts an above-average cashflow generation ability in comparison to other contractors in Saudi Arabia. As such, its funds from operations debt coverage is envisaged to stay healthy at above 0.4 times despite a heavier debt load. Furthermore, RAM has a positive outlook on Saudi Arabia’s construction sector. Government spending, mainly on education, infrastructure and industrial development, is expected to reach an all-time high of SAR855 billion in 2014 (2013: SAR820 billion).

Media contact:
Jason Tan
(603) 7628 1030
Jasontan@ram.com.my

source: RAM Rating Services Berhad
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