KUALA LUMPUR (May 18): RAM Ratings has assigned AA3/Stable/P1 preliminary ratings to MTT Shipping Sdn Bhd’s proposed RM1.5 billion Islamic medium-term notes (IMTN) and Islamic commercial papers (ICP) programme.

“The ratings consider MTT Shipping’s established position in the local container shipping industry and its sturdy debt coverage ratios, even after assuming lower freight/charter tariffs and gaps between charter periods when existing charters expire in our forecast,” said RAM in a statement on Thursday (May 18).

The company provides container liner shipping services to manufacturers, traders and freight forwarders, as well as feeder services to mainline operators. It also has a growing charter hire operation.

According to RAM, the company’s debt-funded expansion and risks from its enlarged fleet — amid weaker demand and poorer trade outlook globally — are moderating factors.

“MTT Shipping is also exposed to bunker fuel cost volatility, foreign exchange risk and the cyclicality of the shipping sector.

“Execution risks and sector volatility are mitigated to some extent, by a strong management team with extensive industry experience (spanning 32 to 41 years) and demonstrated ability to optimise shipping routes in response to the dynamic market,” it said.

RAM consider MTT Shipping a sizeable player, with an estimated 40.5% share of the local market, and a fleet of 17 container vessels with a total capacity of 19,124 twenty-foot equivalent units (TEU).

The company focuses mainly on domestic routes, particularly between Peninsular and East Malaysia, which are more stable with observably less volatile freight rates and volumes compared to international trade routes.

"Amid rapid fleet and trade routes expansion as well as unprecedented hikes in freight and charter rates, MTT Shipping’s revenue registered strong double-digit growth in the past three years, while operating profit before depreciation, interest and tax (OPBDIT) more than doubled to RM625.79 million last year (compared to RM251.87 million in FY2021).

"Consequently, the company’s debt coverage ratios are sturdy at above 0.30 times," it said.

RAM said MTT Shipping has an organised and dynamic approach that emphasises extensive and timely reporting to optimise capacity and maximise yield, supported by investments in various information technology systems.

"This reinforces its business position, resulting in profit margins that are stronger than peers. The long working relationship of the company’s five promoters mitigates its diverse ownership," it said.

RAM also noted MTT Shipping’s debts have risen sharply to RM554.47 million as at end-December 2022 (versus RM92.37 million as at end-December 2018), to increase and modernise its fleet, which is in line with its strategy to expand regionally and explore new routes with a focus on short-sea routes between India, China and Southeast Asia amid increasing regionalisation of trade.

"Gearing, nonetheless, eased substantially to 0.53 times last year, from a high of 1.02 times as at end-December 2021, owing to significantly improved profit as at end-December 2022.

"Debt to OPBDIT ratio was also fairly low at 0.89 times last year. Debt levels are projected to peak at RM940 mil this year upon issuance of the proposed ICP/IMTN before tapering off as operating cashflows sufficiently cover capital expenditure needs.

"Gearing is estimated at around 0.60 times-0.80 times and debt to OPBDIT at under two times," it said.

However, RAM said the company may face challenges in securing customers or chartering out its 11 new vessels, mostly to be delivered in 2024, as global freight rates have plummeted since the second quarter of FY2022 (2QFY2022) due to easing supply chain disruptions and softer demand.

"An anticipated influx of new capacity over 2023 to 2025 will continue to dampen rates. Nonetheless, the better efficiency of the company’s new ships, which are compliant with new regulations, gives it an advantage over older vessels," it noted.

The local trade is expected to be more stable, underpinned by base demand for routes between Peninsular and East Malaysia.

"We expect MTT Shipping’s OPBDIT to moderate to RM450 million to RM500 million in the next few years under our sensitised scenario. Even so, the funds from operations debt cover ratio will be strong at above 0.50 times," it added.