Syarikat Pengeluar Air Sungai Selangor Sdn Bhd - 2008

MARC has affirmed Syarikat Pengeluar Air Sungai Selangor Sdn Bhd’s (SPLASH) ratings of MARC-1ID /AAID on its RM435 million Islamic Notes Issuance Master Programme comprising RM50 million Murabahah Commercial Papers (CPs) and RM385 million Murabahah Medium Term Notes (MMTNs). Concurrently, MARC has revised the rating outlook to developing from stable to reflect SPLASH’s exposure to industry-wide uncertainties associated with concession renegotiations between Suruhanjaya Perkhidmatan Air Negara (SPAN) and water treatment operators as well as the proposed take-over and consolidation of the water-related assets in Selangor by the Selangor State Government (SSG) via its investment arm, Kumpulan Darul Ehsan Bhd (KDEB) or by Pengurusan Asset Air Berhad (PAAB).

The ratings are affirmed based on SPLASH’s solid operating performance and low business risks as the concessionaire for Sungai Selangor Water Supply Scheme Phases 1 and 3. SPLASH has been consistently meeting the required quality and production levels. The ratings are also supported by the robust demand for water in the state of Selangor and Federal Territory of Kuala Lumpur and a tariff structure which ensures predictability of its revenue stream. These positive factors are moderated to some extent by the company’s relatively high debt leverage, and challenges generally faced in securing politically sensitive rate increases.

Wholly-owned subsidiary of Syarikat Pengeluar Air Selangor Holdings Bhd, whose shareholders are Gamuda Bhd (40%), Sweetwater SPV Sdn Bhd (30%) and Viable Chip (M) Sdn Bhd (30%), SPLASH is the concessionaire for Sungai Selangor Water Supply Scheme Phase 1 (SSP1) as well as the Sungai Selangor Water Supply Scheme Phase 3 (SSP3). Both SSP1 and SSP3 have a combined capacity to treat and supply 2,000 million litres of water per day, which makes SPLASH the largest water treatment operator in Selangor. SSP3 is built and operated under a 30-year Build-Operate-Transfer (BOT) concession expiring in 2029 while SSP1 is managed and operated under a 30-year concession expiring also in 2029.

Over the past four years, SPLASH registered an 11% compounded annual growth rate in revenue comprising capacity and bulk supply charges. Revenue stability is derived from the fixed-and-predictable characteristic of capacity charges, which represents the majority (70% to 80%) of total revenue. Operating  margin and cashflow interest  coverage have been consistently maintained at above 45% and
3 times (x) respectively through the years. SPLASH’s gearing, as measured by debt-to-equity ratio (DE), of above 3x is, nonetheless, high relative to that of other water treatment operators in Selangor, and Federal Territories of Kuala Lumpur and Putrajaya. SPLASH’s DE ratio in FY2008 had deteriorated further to 4.82x from 3.31x a year earlier, following a dividend payment of RM365 million. Nonetheless, SPLASH’s debt leverage remains manageable in the light of its continued strong financial and operating performances.

Major Rating Factors

Strengths

• Strong cash flow from operations and sound profitability margins;
• Water tariff structure supports predictable and stable earnings and cash flow generation; and
• Robust demand for water in the densely populated Klang Valley.  

Challenges/Risks

• Long debt repayment period due to relatively high gearing level;
• Weaker debt service coverages if tariff rates fall lower than projected; and
• Uncertainties arising from restructuring of Selangor state’s water industry.