Aliran Ihsan Resources Bhd - 2007

MARC has reaffirmed its A rating on Aliran Ihsan Resources Berhad’s (AIRB) RM56.9 million Redeemable Convertible Unsecured Loan Stocks (RCULS). The rating carries a developing outlook.

The rating is reaffirmed based on strong water demand in the state of Johor, and the predictable income streams of its wholly-owned subsidiary, Southern Water Corporation Sdn Bhd (SWC) and 49% owned associated company, Equiventures Sdn Bhd (ESB), both of which are holders of water treatment concessions, and AIRB’s modest debt leverage. These positive factors are offset to some extent by deterioration in AIRB’s cash flow stability caused by delays in the collection of receivables from the offtakers, Syarikat Air Johor Sdn Bhd (SAJ) and Johor State Government (JSG). SAJ and JSG are the respective offtakers for treated water under the water concessions held by SWC and ESB. The developing outlook reflects uncertainties pertaining to the outcome of litigation against SAJ and JSG on uncollected receivables.

Under the concession agreements signed with SAJ and JSG, SWC and ESB are to receive fixed monthly payments and variable bulk water charges from the state-owned body and the state government for the sale of treated water. The variable component of the bulk water tariff is adjusted annually with reference to inflation, energy costs and chemicals whilst the fixed monthly payment is inflation-adjusted. The tariff framework provides considerable protection and revenue stability to AIRB. Although AIRB’s revenue remained flat at about RM61 million for the past two years, its pre-tax profit rose by 33.2% to RM36.27 million in FY2007 on account of an increase in its share of profit of its associated company and declining costs. AIRB also recorded lower depreciation charges and provisions for debt in contention.

Despite its stable revenue trend, AIRB’s cash flow position has deteriorated over the past two years due to uncollected receivables from SAJ and JSG. Notwithstanding, debt service coverage remains sufficient at 18.16 times with AIRB relying on its cash reserves which stood at RM51.66 million as at 30 June 2007.

AIRB’s relatively high level of revenue certainty and low level of business risk provides underlying stability for its rating. However, downward pressure on the current stability of the rating is emerging, potentially through longer term revenue collectability issues. In the near-term, AIRB is expected to maintain adequate cash flow protection for its rating level.

Major Rating Factors

Strengths

• Robust water demand in the state of Johor;
• Stable revenue from the sales of treated water underpinned by the concession agreements; and
• Low leverage aided by the conversion of RCULS.

Challenges/Risks

• Deteriorating cash flow position;
• Additional uncertainties arising from AIRB’s on-going litigation with Syarikat Air Johor Sdn Bhd and the Johor State Government; and
• On-going water industry reform at state and federal levels.