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RAM Ratings reaffirms Muhibbah's Sukuk rating.

The AAA(s) rating is supported by the irrevocable and unconditional guarantee from Malayan Banking (Maybank), to honour Muhibbah's irrevocable and unconditional undertaking to purchase and cancel all the Sukuk at the exercise price upon the declaration of an event of default (Purchase Undertaking). 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 Sukuk beyond Muhibbah's inherent or stand-alone credit standing.

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 three international airports in Cambodia.

Excluding the bank guarantee, Muhibbah's credit profile is underpinned by its track record within the construction industry, specialising in oil-and-gas-related jobs, as well as marine-engineering and civil-engineering works. Muhibbah's outstanding order book of MYR 2.9 billion ($968.6 million) as at 19 May 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.

Nevertheless, the Group's credit profile has 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 per cent in fiscal 2007. 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.

2011 CPI Financial. All rights reserved.

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Publication:CPI Financial
Date:Jul 10, 2011
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