Fitch Ratings has downgraded Malaysia-based energy-service provider Serba Dinamik Holdings Berhad’s (SDHB) Long-Term Issuer Default Rating to ‘CCC-‘ from ‘B-‘. Fitch has also downgraded the senior unsecured sukuk due May 2022 and March 2025 to ‘CCC-‘, from ‘B-‘ with a Recovery Rating of ‘RR4’. All the ratings were removed from Rating Watch Negative (RWN), which was placed on 3 June 2021.
The downgrade reflects SDHB’s diminished cash reserves, stretched liquidity and heightened refinancing risk on short-term debt with MYR100 million in commercial paper and USD222 million in sukuk, both due in May 2022. SDHB’s access to debt funding will continue to face challenges given the previous auditor requested an independent review – compounded by delays in the release of its audited financial statements. The review is ongoing, and it is unclear when it will be finalised and, pending its satisfactory completion, SDHB has limited time to address its impending maturities.
KEY RATING DRIVERS
Refinancing Risks, Diminished Cash: We believe there is sufficient cash for the MYR99 million amortisation payment on a syndicated loan in December 2021 but liquidity will then weaken materially. Two other key loans due in May 2022 are the MYR100 million in commercial paper and the USD222 million in sukuk. Cash reserves had declined to MYR497 million by end-June 2021 from MYR1 billion at end-March.
It also forecast free cash flow to be negative for next three years because of SDHB’s high working-capital requirements, and therefore additional funding for its business will further exacerbate its liquidity position.
High Working Capital: SDHB’s working capital remained high as inventories and plant property and equipment increased again during 2Q21. SDHB has continued to stock up inventories on site to better carry out its service contracts. This has greatly diminished it cash reserves.
Receivables were flat in 2Q21 compared with the previous quarter, indicating that SDHB’s customer collections during this period could be slower than Fitch expected. In contrast, payables declined, which could hint at supplier pressure for shorter payment periods and concerns with respect to reputation, which could affect successful bidding on new contracts. SDHB’s working-capital needs will remain high as it relies on increasing working-capital facilities to smooth operations and bridge the lag between rendering services and the receipt of cash.
SDHB’s business operations remained weak in 2Q21, hurt by movement restrictions during Covid-19. Service delivery was affected but costs also remained high as SDHB could not reduce costs materially, such as mobilising its contracted labour. The gross profit margin declined to about 11%, from an average 17%. We estimate 3Q21 performance remained muted, as its first and third quarters are generally more subdued. Still, operations should improve as restrictions are lifted and the business environment recovers.
Its audited June 2021 financial statements will be delayed by one month to November 2021, despite a change in its financial year end from December to June. Any further delays will create more uncertainty and cloud refinancing prospects.
Audit Review Constrains Funds Access: SDHB’s ex-auditor KPMG had during the 2020 statutory audit, requested an independent firm to review SDHB to assess the veracity and accuracy of parts of the business, including several customers and suppliers as well as receivables and inventories. This review is ongoing and pending its conclusion, Fitch believes SDHB’s access to credit facilities, especially given delayed audited financial statements, could be constrained as lenders become more stringent in requirements.
The regulator has suspended trading of SDHB’s shares, and instructed the company to release a status update on the special independent review. SDHB responded that all findings were preliminary and inconclusive. The stock trading remains suspended, thus further dampening lender and investor confidence.
SDHB has an ESG Relevance Score of ‘4’ for Management Strategy and Financial Transparency, due to the delayed release of its audited financials as well as an ongoing independent review by E&Y.
