SAJ CAPITAL SDN BHD - 2022 |
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| Report ID | 6053890046879 | Popularity | 647 views 39 downloads | |||||
| Report Date | Aug 2022 | Product | ||||||
| Company / Issuer | SAJ Capital Sdn Bhd | Sector | Infrastructure & Utilities - Water | |||||
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| Rationale |
Rating action MARC Ratings has affirmed its rating of AA-IS on SAJ Capital Sdn Bhd’s Sukuk Murabahah of up to RM650.0 million with a stable outlook. Total outstanding under the sukuk as at end-May 2022 is RM520 million. Rationale SAJ Capital is 100%-owned by Ranhill Capital Sdn Bhd. The latter holds an 80% interest in Ranhill SAJ Sdn Bhd, the exclusive provider of source-to-tap water in Johor. SAJ Capital is a single-purpose funding conduit for the sukuk issuance, with the source for profit and principal repayments to come from dividends from Ranhill SAJ. The rating on the sukuk, therefore, reflects the credit strength of Ranhill SAJ. The rating is driven by Ranhill SAJ’s strong business position as the exclusive provider of essential treated water to a population of approximately 3.79 million in Johor. Water usage has largely been steady over the years, despite some softening during the pandemic. Ranhill SAJ served approximately 1.24 million accounts in 2021, up 1.6% y-o-y (2020: +2.3%). Of these, approximately 86% were residential units, lending some stability to water usage in 2021 and a muted pandemic impact on revenue. Consumption and revenue from residential users were up around 2% and 3% last year to partially offset the 4% and 3% declines from commercial users. This helped cushion the overall volume and revenue decline to just 0.5% and 0.8% to 504.9 million m3 and RM1.10 billion in 2021 (2020: 507.5 million m3 and RM1.11 billion). Outstanding accounts as a percentage of revenue stayed less than 10% as at end-2021, with average collection period (36 days) remaining comparatively consistent with levels seen over the last several years. Moderating the rating is that Ranhill SAJ has no independent legal ability to increase service rates without the government’s approval. Operating cost increases that outpace growth in water tariffs could pressure profitability and cash flow generation. Ranhill SAJ is also exposed to licensing risk, although we see this as low given the company’s well-established operations in water treatment and distribution, and strong performance record in meeting the key performance indicators (KPI) set by regulator, National Water Services Commission (SPAN). License to operate water assets is renewable every three years by SPAN, and Ranhill SAJ is currently in its fifth operating period (January 2021 to December 2023). The company also operates under a 45-year Facility Agreement (from September 1, 2009) with the national water asset owner, Pengurusan Aset Air Berhad (PAAB), from whom it leases water assets. Ranhill SAJ has a clean balance sheet as it is prohibited from incurring borrowings unrelated to its licensed activities, while having limited capital needs as the responsibility to develop water assets and associated funding lies with PAAB. In 2021, Ranhill SAJ distributed RM90.0 million in dividends (2020: RM170.0 million), of which SAJ Capital received RM72 million for its 80% share (via Ranhill Capital). Under the base case projections that assume dividend payments of RM110 million to RM150 million a year to shareholders, or RM88 million to RM120 million p.a. to SAJ Capital for its 80% share, the issuer’s financial service cover ratio (FSCR) is projected to be strong at an average 3.2x for the three-year outlook period to 2024, well above the covenanted 1.5x. Our breakeven analysis indicates that SAJ Capital will require a minimum annual dividend of about RM53 million from Ranhill SAJ for the issuer to meet the covenanted FSCR of 1.5x. Rating outlook The stable outlook considers the stable water demand characteristics, and reflects our expectation that Ranhill SAJ’s operating performance will remain robust to enable it to upstream dividends and provide a healthy debt service buffer to SAJ Capital. Rating trajectory Upside scenario An upgrade in the near term is unlikely but sustained improvements to Ranhill SAJ’s operational and financial profiles could lead to a positive rating action. Greater rate flexibility, which could enhance prospects for beating forecast expectations and fortify financial metrics, will be credit positive. Downside scenario The rating could come under downward pressure in the event of significant operational underperformance by Ranhill SAJ on a sustained basis, leading to reduced headroom for Ranhill SAJ to distribute dividends. As SAJ Capital relies on dividends from Ranhill SAJ to service its sukuk, a smaller-than-expected dividend stream from Ranhill SAJ could weigh on SAJ Capital’s credit quality. Key strengths
Key risks
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