MARC has placed Aliran Ihsan Resources Berhad’s (AIRB) RM56.9 million Redeemable Convertible Unsecured Loan Stocks (RCULS) rating of A (A flat) on a MARCWatch with a Developing Outlook. The rating watch is based on a proposal by the Johor State Government (JSG) to restructure the water supply services in the state of Johor. In our discussion with AIRB’s management, we have been informed that the concessionaires within the company have not yet received any explicit official notification from JSG, in respect of the proposal, MARC will nevertheless continue to monitor developments with regard to the proposed scheme and assess the potential impact on AIRB.

AIRB was the vehicle established to undertake the restructuring scheme (the Scheme) of RNC Corporation Berhad (RNC), a PN4 condition company. The Scheme which was completed in November 2004 saw AIRB venturing into the water business and at the same time assumed the listing status of RNC in March 2005.

AIRB group comprises a wholly owned subsidiary, Southern Water Corporation Sdn Bhd (SWC) and two other associate companies, Equiventures Sdn Bhd (ESB) and Strategi Tegas Sdn Bhd (STSB). SWC and ESB are principally involved in water treatment and rehabilitation of water treatment plants (WTP) as well as operations, maintenance and services of the WTPs. Currently, SWC operates and maintains 14 WTPs whereas ESB maintains two WTPs in Johor. In return, both concessionaires will receive fixed monthly payments (FMP) and bulk sales rates (BSR) for the sale of the treated water from SAJ Holdings Sdn Bhd (SAJH), the party which was awarded the privatization of water supply services in Johor.

Recently, the JSG has proposed to undertake a scheme where a Special Purpose Vehicle (SPV) company to be wholly owned by JSG will be used to restructure the water services industry in the state. Further to the proposed scheme, there are plans by the SPV to lease the water assets to SAJH.

On 1 December 2004, AIRB replaced RNC’s position as the holding company which was laid out under the Scheme. With the new structure, AIRB consolidated 7 months figure until end-June 2005 while the previous months were considered as pre-acquisition profit from the view of AIRB. The group consequently posted revenue of RM 34.61 million with a profit before tax of RM1.73 million for FY2005. AIRB’s operating margin was, however, affected due to the debt restructuring exercise expenses amounting to RM4.9 million during the year.

AIRB’s debt leverage increased due to long term borrowing issued to settle RNC’s payables, non trade payables and the bank loans following the implementation of the Scheme. Going forward, debt leverage is expected to decline given the enlarged capital base and favourable cash flow position.