The group’s rating evaluation is supported by its solid financial profile, short- to medium-term revenue visibility and low earnings cyclicality
by SHAHEERA AZNAM SHAH / pic credit: e-serbadk.com
SERBA Dinamik Holdings Bhd was named among the high-yielding corporate firms in Asia by Fitch Ratings Inc (Fitch Ratings) — the only Malaysia-based firm listed in the rating agency’s top 50 Asian high-yield corporate issuers.
Fitch Ratings analysts Bernard Kie and Shahim Zubair said Serba Dinamik’s rating reflects its strong market presence in Malaysia, backed by the company’s position as the fourth-largest oil and gas (O&G) service and equipment provider by revenue in 2017.
The company’s rating evaluation is also supported by its solid financial profile, short- to medium-term revenue visibility and low earnings cyclicality.
“Serba Dinamik’s smaller operating scale, and limited product and end-market diversification relative to other higher-rated peers constrain its rating,” the analysts said in a report released on Wednesday.
Fitch Ratings said Serba Dinamik has established a reputation for project completion through its growing orderbook which increased by more than eightfold in the span of five years until 2018, and reaching RM10 billion by the third quarter of 2019 (3Q19).
The company’s orderbook to revenue ratio was about 2.5 times at the end of September 2019, and Fitch Ratings expects it to be at 1.5 times to two times in the medium term, providing revenue visibility.
“We also believe Serba Dinamik is well-positioned to benefit from vendor consolidation and rising capital expenditure (capex) in the downstream segment by national oil company, Petroliam Nasional Bhd (Petronas), which is an ‘A-‘ and ‘Stable’ rating company,” the report read.
Fitch Ratings said despite its strong financials, Serba Dinamik’s rating is constrained by its small operating scale, limited product and end-market diversification relative to Fitch Ratings-rated peers.
It added that the company’s needs for capex — which is limiting its ability to generate neutral-to-positive free cashflow — is also affecting its rating.
“Nevertheless, this is partly compensated by Serba Dinamik’s focus on mid-tier clients, who support its bargaining power and have translated into industry-leading profit margins,” the rating agency said.
Fitch Ratings expects the company to make several acquisitions of around US$10 million (RM41.5 million) each as part of its asset-ownership strategy, which might drive the firm’s growth in the longer term.
However, it said the acquisitions present integration risks, while the leverage may increase and could affect the company’s credit profile.
“Fitch Ratings believes these risks are mitigated by the small value of the acquisitions, the short investment payback period and Serba Dinamik’s expertise in the industry,” it noted.
Fitch Ratings said the Asian high-yield market has been expanding continuously over the last decade and is now a distinct asset class in its own right.
High-yield issuers — as defined by JPMorgan Chase & Co’s composite rating — in the JP Morgan Asia Credit Index already account for 17% of the market capitalisation of the index and 23%, if including unrated names, the rating agency added.
The Asia Corporate High-Yield 50 has a cumulative US$508 billion in debt forecast to be outstanding by the end of 2020, of which US$122 billion represent cross-border high-yield bonds.
Some 64% of the featured companies have a rating in the “BB” category, while four of the 18 “BB-” rated names are on negative outlook, illustrating the potential for further downgrades into single “B” category.
Fitch Ratings has taken negative rating action on 13% or 26% of its Asia Corporate High-Yield 50 portfolio since the start of March, downgrading six, two by more than one notch, and revised the outlook or watch on further some seven corporates.