SAJ Holdings Sdn Bhd - 2007

MARC has reaffirmed its rating on SAJ Holdings Sdn Bhd’s (‘SAJH’) RM1.28 billion Bai Bithaman Ajil Islamic Debt Securities (BaIDS) at AA- ID with a stable outlook. The rating is premised upon SAJH’s dominant position as the sole distributor of treated water in the State of Johor; robust water demand; improved financial performance in FY2007; low operating risk and improved operating efficiency; and the BaIDS’ protective issue structure and covenants. The ratings are, however, moderated by the heavy ongoing capital expenditure to enhance operational efficiency.

SAJH is the sole concession holder for the State of Johor’s integrated water supply operations under a 30-year concession (until 2030) with the Johor State Government. Subsequent to the implementation of certain water industry restructuring initiatives undertaken by the Johor State Government in 2005, SAJH has been purchasing treated water from Johor Special Water Sdn Bhd (‘JSW’), a Johor State-owned entity. The concession’s tariff mechanism allows full cost recovery and a 30-year pre-determined project internal rate of return (‘IRR’) to SAJH. The Johor State Government is obliged to gazette tariffs or compensate SAJH in circumstances where the gazetted tariff is lower than the applicable Agreed Tariff or implementation has been delayed, subject to the project IRR being maintained within the agreed band of 14% to 18%. The above results in robust profitability and cash flow generation ability and strong debt service coverage ratios.

SAJH continues to exhibit improved operating efficiency. As of August 2007, its Non Revenue Water (NRW) level was 31.1%, down from 37.4% in January 2004 while its billing cycle improved marginally from 30.67 days previously to 30.60 days in FY2007.

In FY2007, SAJH’s revenue which mainly consists of sales of water increased by 8.9% year-on-year, attributed to tariff hike of 2.4% effective January 2007 coupled with increased water consumption in Johor. Profitability and cash flow from operation interest coverage strengthened from 2.04 times to 6.46 times  attributed to the higher  annualized revenue and improved collection of receivables and savings in the cost of purchase treated water. The cost of treated water has declined since SAJH commenced purchasing bulk water through JSW. SAJH was in compliance with its maximum covenanted debt of 2.33:1 times, its debt to equity ratio of 1.34 times as at 30 June 2007 affords considerable headroom for additional debt leverage. SAJH’s financial service coverage ratio (FSCR) was 6.82 times as at 30 June 2007, well above the covenanted minimum FSCR of 2.25 times. The balance of SAJH’s Finance Service Reserve Account as of 31 December 2007 stood at RM227.53 million and there are no principal payments due on the BaIDS until 2010.

The stable outlook reflects the favourable long-term water demand fundamentals and SAJH’s dominant role as a distributor of treated water in Johor. Its favourable tariff structure ensures SAJH will continue to produce more than adequate and stable debt service coverage over the next several years.

Major Rating Factors

Strengths

• Sole distributor of treated water in the state of Johor;
• Robust demand of water and low volume volatility ;
• Low operating risk and improved operating efficiency;
• Debt service coverage is forecasted to remain strong underpinned by stable cash flows from water sales; and
• IRR is set between 14% to 18% coupled with compensation clause under the CA serve as protective measures for stakeholders and bondholders.

Challenges/Risks

• Heavy capital expenditure to enhance operational efficiency;
• Restrained borrowing capacity as total long term indebtedness is reaching its maximum threshold; and
• Constraint internal generation of capital expenditure due to protective measure of bond structure.