Syarikat Bekalan Air Selangor Sdn Bhd - 2007

MARC has reaffirmed Syarikat Bekalan Air Selangor Sdn Bhd’s (SYABAS) RM3.0 billion Bai Bithaman Ajil Commercial Papers/Medium Term Notes Programme ratings of MARC-1ID /AA-ID. The ratings carry a stable outlook.

The ratings reflect SYABAS’ dominant position as the sole distributor of treated water for the states of Selangor, Kuala Lumpur and Putrajaya; the low risk nature of the water industry; the increasing water demand in its service areas; and the improving NRW levels achieved by SYABAS. The ratings are, however, moderated by the heavy ongoing capital expenditure incurred to enhance operational efficiency and to reduce Non-Revenue Water (NRW) which continues to be reflected in its negative free cash flow.

Strong water demand continues to be evidenced by its increasing customer base and the growth in water consumption. Customer base increased by 1.88% from FY2005 while commercial sales and domestic consumption rose by 4% and 5% respectively. Based on a study by independent consultants, demand for treated water is projected to reach 6,810 million litres per day (MLD) by year 2020. Currently, combined design capacity of the water treatment plants in the State of Selangor, Kuala Lumpur and Putrajaya stands at 4,474 MLD.

SYABAS is in the midst of undertaking the development and upgrading of distribution system, asset replacement, and NRW reduction programme to reduce NRW to 15% by the end of year 2015.  As at end December 2005, SYABAS reduced its NRW level ahead of its target of 37.8% to 37.3%, and in doing so, achieved its Key Performance Indicator for the first operating period of its water supply concession. NRW was further reduced to 34.8% in December 2006 and as of July 2007, the NRW level was down to 32.7%. 

The Concession Agreement (CA) provides for a revision in water tariffs for end-consumers every three years. The tariff formula incorporates a performance-linked adjustment to provide an incentive for SYABAS to achieve operational efficiency and NRW reduction as per the NRW reduction schedule. SYABAS  was granted a tariff increase on November 1, 2006. The GOM has  approved a compensation of RM129 million payable to SYABAS in respect of the 10-month delay in granting the tariff increase as the tariff adjustment was originally scheduled to occur in January 2006. In August 2007, SYABAS received part of the compensation payment and is currently waiting for the final payment of the said compensation.

The company’s operating profit before tax and interest (OPBIT) margin remains consistently at a satisfactory level for the past two years. SYABAS generated higher OPBIT margin of 20.7% in FY2006 compared to 18.7% in FY2005 despite a sharp rise in finance costs from RM15.53 million in FY2005 to RM68.76 million in FY2006. The improved OPBIT margin was supported by revenue growth of 18.3%, attributed to growth in water demand and the government compensation of RM129 million for the delay in water tariff revision. SYABAS’ ability to generate free cash flow is constrained by its heavy capital expenditure programme as well as the increase in interest costs stemming from the increase in SYABAS’ debts. SYABAS is only expected to generate positive free cash flow in FY2009. Its debt service cover ratio, however, remains sufficient at 9.25 times.

The stable outlook reflects the favourable long-term water demand fundamentals in SYABAS’ service area and SYABAS natural monopoly in its role as a distributor of treated water. Its regulated revenue stream continues to support ratings stability.

Major Rating Factors

Strengths

• Sole distributor of treated water in the states of Selangor, Kuala Lumpur and Putrajaya;
• Debt service coverage is forecast to remain strong underpinned by stable cash flows from water sales; and
• Robust demand for water and low volume volatility.

Challenges/Risks

• Heavy capital expenditure requirements impede free cash flow generation; and
• Uncertainty associated with the restructuring of the domestic water industry.