Fitch: Malaysia’s Budget has limited impact on rated corporations

SINGAPORE: The proposals in Malaysia’s 2019 Budget are likely to have only a limited impact to Fitch Ratings’ rated Malaysian issuers, Petroliam Nasional Bhd (Petronas) (A-/ Stable), Genting Bhd

The rating agency said on Monday the Malaysian government proposed to revise casino duties up to 35%, representing a 10 percentage point increase over existing duty rates.

This saw Genting Malaysia reviewing its marketing strategy and cost structure to mitigate the financial impact of the proposed tax increase.

Due to this increase, Fitch estimated Genting Bhd’s consolidated EBITDAR after minorities will decline by around 8%-9%, and net debt/EBITDAR will increase to 0.6 times in 2019 and 0.9 times in 2020 versus our previous expectation of 0.5 times and 0.7 times, respectively.

This is assuming the tax rate will increase by 10 percentage point on gaming revenue before factoring in any potential cost savings from Genting Malaysia’s review of its marketing strategy and cost structure.

Under this scenario, Genting Bhd’s financial profile remains in line with Fitch’s leverage expectation of below one time, although headroom is reduced as the company embarks on its third large-scale integrated resort development in Las Vegas.

The Malaysian government will also implement a 10% palm oil blending rate (B10 programme) for biodiesel used in transportation sector and 7% rate for biodiesel in the industrial sector, as well as allocate RM30mil to assist smallholders to obtain Malaysian Sustainable Palm Oil certification.

Fitch sees these initiatives as positive to support the Malaysian palm oil industry in the long term.

However, the impact is likely to be limited on overall demand and crude palm oil (CPO) price in the short term.

Therefore, Fitch expects neutral rating impact on Sime Darby Plantation Bhd.

In the case of state-owned oil and gas company Petronas, the rating agency does not expect the special one-off dividend of RM30bil, which will be paid to the state in 2019 — to reverse its net cash position.

As at end June 2018, Petronas reported cash balances of RM174bil and debt of RM66bil.

Fitch expects the special dividend to be in addition to regular dividends, which its expect to be between RM20bil and RM26bil in 2019 (RM24bil in 2018).

Fitch does not rule out the possibility of higher dividend pay-outs over the coming few years, supported by a likely increase in Petronas’ profits compared with 2017.

Despite the potentially higher dividends, Fitch expects Petronas’ standalone credit profile of “AA-” to remain intact.

The Malaysian government has historically allowed Petronas to maintain a robust credit profile and cash balances with its dividends being lowered in line with weaker earnings, as was the case in 2015 and 2016.

Fitch thinks the government would support Petronas maintaining a sustained healthy credit profile due to its importance in generating national revenue and given the company’s need to expand to sustain and improve its earnings generation.

The Issuer Default Ratings on Petronas remain constrained by Malaysia’s ratings (A-/Stable) as per Fitch’s government-related entities rating criteria.

The government can exert significant influence and control over Petronas’ operating and financial policies, as is evident in the proposed special dividend. – Bloomberg

Source: TheStar