GAS DISTRICT COOLING (PUTRAJAYA) SDN BHD - 2020 |
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| Report ID | 605300 | Popularity | 1197 views 41 downloads | |||||
| Report Date | Oct 2020 | Product | ||||||
| Company / Issuer | Gas District Cooling (Putrajaya) Sdn Bhd | Sector | Infrastructure & Utilities - Gas District Cooling | |||||
| Price (RM) |
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| Rationale |
MARC has affirmed its AAAIS rating on Gas District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook. The current outstanding of RM50 million BaIDS is payable in December 2022. The rating incorporates a three-notch uplift for parental support from Putrajaya Holdings Berhad (PJH), which carries a rating of AAA/stable from MARC. The parental support assessment considers GDC Putrajaya as a strategic 100%-owned subsidiary of PJH as the sole supplier of chilled water for all government and commercial buildings in Putrajaya. This role is carried out under long-term offtake agreements which have enabled the company to generate steady revenue. However, the absence of a gas and utility full cost pass-through mechanism in the government offtake agreements that make up two-thirds of GDC Putrajaya’s business moderate the rating. GDC Putrajaya operates and maintains a district cooling system of six plants. Its key customer, the government consumed about 80% of total chilled water supplied in 1H2020, followed by third-party offtakers (including hotels, colleges and malls) at around 11% and parent PJH at 9%. Tariffs on the chilled water supplied to the offtakers comprise a demand charge and a variable charge; the demand charge, which accounted for 73.0% of GDC Putrajaya’s revenue in 1H2020, mitigates demand risk and is designed to cover part of the company’s fixed operating costs and debt service obligations. The variable charge is based on actual chilled water delivered. For 1H2020, actual delivered chilled water fell 10% y-o-y, largely due to closures or underutilisation of office buildings following the imposition of the Movement Control Order (MCO) to stem the spread of COVID-19. Demand of chilled water has, nevertheless, been largely consistent prior to this, averaging around 182 million refrigeration tonnage hours (RTh) p.a. in the past three years. MARC also notes renewal negotiations are ongoing for the government offtake agreements (representing 67% of all agreements expiring May 9, 2021), alongside with three third party offtakers and four parent PJH offtakers expiring in the same year. Non-renewal risk is viewed as low given GDC Putrajaya’s monopoly in the supply of chilled water in Putrajaya and the client-supplier relationships that have spanned over more than two decades. Concurrent with the renewal negotiations, the company will seek to incorporate a cost pass-through mechanism in the government offtake agreements, the absence of which has meant GDC Putrajaya has had to absorb increases in gas cost, leading to fluctuating operating margins. Gas price is now reset every three months effective July 1, 2020 when the price of gas GDC Putrajaya paid to supplier Petronas Energy & Gas Trading Sdn Bhd reaches market parity, and as per the agreement, will now follow a contract price formula, reset every three months based on the Malaysia Reference Price (MRP). The timing mismatch between gas price revision and tariff increases (every three years) is expected to be addressed in the renewal negotiation. However, for non-government offtake agreements, a cost pass-through mechanism is present. For 1H2020, revenue rose 7.3% y-o-y to RM114.9 million, supported by an increase in tariffs beginning January 1, 2020. Pre-tax profit in 1H2020 rose to RM27.8 million, as operating profit margin broadened to 27.2% from 20.6% a year ago. This was helped by the 7.4% expansion in revenue and operating costs that had remained relatively unchanged during the period. GDC Putrajaya maintained low leverage with a DE ratio of 0.12x; as at end-June 2020, the company carried a debt of RM50.3 million and had cash of RM75.4 million, which put it in a net cash position. The stable outlook is premised on our expectations that there will be no material change to GDC Putrajaya’s business and financial profile over the next 12-18 months and that parental support will be forthcoming should the need arises. Major Rating Factors Strengths • Strong support from parent Putrajaya Holdings Berhad; • Sole supplier of chilled water in Putrajaya; and • Contracted demand charges cover fixed operating and financing costs. Challenge/Risk • Absence of full cost pass-through mechanism in government offtake agreements. |
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