Syarikat Pengeluar Air Sungai Selangor Sdn Bhd - 2007

Major Rating Factors

Strengths

• Financial profile remains sound with the potential to improve further in the medium-term;
• Some 70% to 80% of SPLASH’s revenues is derived from capacity charges which promotes revenue stability; and
• Robust demand for water provided by SPLASH from ultimate consumers, of which residential customers represent the majority.

Challenges/Risks

• Structural uncertainties in the domestic water industry posed by impending industry restructuring;
• Long debt payback period due to relatively high gearing level; and
• Debt service coverages could exhibit vulnerability if bulk supply rates are lower than projected.

Rationale         MARC has affirmed the MARC-1ID /AAID ratings of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd’s (“SPLASH”) RM435 million Islamic Notes Issuance Master Programme, comprising RM50 million Murabahah Commercial Papers (“CPs”) and RM385 million Murabahah Medium Term Notes (“MMTNs”). The ratings carry a stable outlook.

The ratings are supported by SPLASH’s stable operational and financial performance as well as its predictable revenue stream underpinned by its favourable tariff structure and its low obligor risk in relation to its sole offtaker, Syarikat Bekalan Air Selangor Sdn Bhd (“SYABAS”). These positive factors are offset to some extent by expectations of moderate cashflow protection measures during the tenor of the CPs and MMTNs, as well as a relatively high debt leverage.

SPLASH is a wholly-owned subsidiary of Syarikat Pengeluar Air Selangor Holdings Bhd (“SPLASH Holdings”), formed to undertake the privatization of the O&M of the Phase 1 water treatment facilities at Bukit Badong (“SSP1”), as well as the construction and O&M of Phase 3 of the Sungai Selangor Water Supply Scheme (“SSP3”). The shareholders of SPLASH Holdings comprise Gamuda Bhd (40%), The Sweet Water Alliance Sdn Bhd (30%) and Kumpulan Perangsang Selangor Bhd (30%).

Revenue has been on an upward trend for the past 5 years. SPLASH’s revenue is mainly composed of capacity charges and variable supply charges. With the commissioning of SSP3 – Badong Water Treatment Plant (“WTP”) Stage 2 in July 2005, capacity charges have risen to a high of RM470.49 million in FY2007 from RM441.4 million in FY2006. Capacity charges have historically contributed 70% to 75% of SPLASH’s revenue. Revenue in FY2007 also increased due to an 8.88% growth in revenue from supply charges, primarily attributable to higher sales of treated water to SYABAS. Operating margins have been consistently maintained above 45% through the years, as a result of robust demand for water services, and the sizeable fixed component of its revenue which largely insulates SPLASH from fluctuations in water demand. Profitability during FY2007 was, however, affected by increased interest charges, as indicated by its pre-tax profit which declined to RM118.6 million in FY2007 from RM136.0 million in FY2006.

With the commissioning of SSP3 – Badong WTP Stage 2, cash flow from operations (CFO) has been improving with the CFO Interest Coverage recording consistently exceeding 3 times. SPLASH’s Debt Service Cover Ratio reached 4.02 times in the year ended, 31 December 2006 above the covenanted level of 1.10 times. Its Debt Service Reserve Account balance as at 31 July 2007 of RM63.01 million is sufficient to cover the next redemption of the Primary and Secondary MMTNs of RM20.249 million due in November 2007.

SPLASH continues to operate with a fairly aggressive financial profile although its gearing (measured by debt to equity) reduced from 4.37 times in FY2005 to 3.77 times in FY2006 and more recently to 3.31 times in FY2007. The improvement in the DE ratio was mainly by a result of internal capital generation, as indicated by its rising retained profits.  The assigned rating outlook reflects the expected stable earnings of SPLASH, with no significant change in its medium-term financial position anticipated.