Puncak Niaga (M) Sdn Bhd - 2008 / 2009

MARC has affirmed Puncak Niaga (M) Sdn Bhd’s (PNSB) ratings of AAID on its RM1.02 billion Bai Bithaman Ajil Islamic Debt Securities (BaIDS) and A+ respectively on both its RM546.875 million Junior Notes A (A Notes) and RM435.0 million Nominal Value Redeemable Unsecured Bonds (RUBs). The AAID rating of the BaIDS acknowledges the legal priority of the secured debt over the other rated obligations of PNSB, protective covenants restricting dividends and additional secured debt as well as the ample reserve funds maintained in a 12-month debt service reserve account for the BaIDS. The RUBs are rated the same as the A Notes, reflecting its pari passu ranking with all other present and future unsecured obligations and similar covenant package.

MARC has revised its outlook on PNSB’s ratings to developing from stable to reflect the proposed restructuring of the Selangor state’s water industry. PNSB’s parent, Puncak Niaga Holdings Bhd (PNHB) had recently rejected the Selangor state government’s offer of RM1.14 billion for PNSB’s asset and RM543.0 million for its equity due to a number of reasons including the fact that the amount would be insufficient to address all liabilities of PNSB. PNHB also rejected the state’s offer for the assets and equity of related entity and sole offtaker of PNSB’s treated water, Syarikat Bekalan Air Selangor Sdn Bhd (Syabas). As highlighted in MARC’s recent rating announcement on Syabas, the latter company faces the risk of lower-than-expected tariff revision and could potentially face the risk of unilateral termination of its concession agreement (CA) arising from purported breaches of certain provisions in the CA as reported by the media. MARC understands from Syabas that it has not received any official notification on the alleged breaches and also that its actions have been in compliance with the provisions of the CA.
 
The affirmed ratings are supported by the continued strength of water demand fundamentals in the state of Selangor, and Federal Territories of Kuala Lumpur and Putrajaya, cash flow certainty due to the structure of the bulk supply rate (BSR) and better collections from Syabas, the distributor of treated water. Nevertheless, the rating is constrained by the nature of the water tariff revision process and the heavy debt maturities in certain years. The concession agreements only allow water tariff revisions at the end of 11th month yearly, limiting the concessionaire’s ability to pass on cost increases in the intervening period, such as the earlier increase in electricity tariffs which came into effect on July 1, 2008 prior to the BSR adjustment effective November 1, 2008.

PNSB is the concessionaire for the operations and maintenance of 30 water treatment plants (WTP) in the Klang Valley including latest additions to PNSB’s portfolio, the Sungai Lolo WTP and Sungai Sireh WTP, both in Selangor. PNSB also undertakes turnkey water projects and is presently undertaking a turnkey project in Sabah.

For the financial year ended December 31, 2007 (FY2007), PNSB’s revenue grew by 20.8% to RM869.4 million while pre-tax profit shrank by a significant 41.3% to RM96.3 million. The weaker profitability was resulted from higher recognised expenses of its nearly completed turnkey construction contract in respect of a water supply scheme in Sabah, higher finance costs following the RUBs issuance in December 2006 and a sharp increase in electricity costs due to the increase in electricity tariff in July 2008. Under the concession, PNSB is allowed to recover the increase in electricity cost through the BSR revision for 2009. However, MARC foresees lower revenue for the next financial year on account of lower construction income with the Sabah turnkey contract nearing completion and the absence of new major projects in the pipeline.

PNSB’s operating profit before interest and tax (OPBIT) margin for the past few years remains strong despite having fallen to 31.2% in FY2007. PNSB’s bulk water sale, which accounts for about 65% of total revenue in FY2007, imparts a high degree of stability to its earnings. Meanwhile, PNSB’s cash flow generation has been constrained by its high operating costs and capital expenditure. PNSB generated lower free cash flow of RM255.5 million in FY2007 compared to RM359.8 million in FY2006. Notwithstanding, PNSB’s debt service cover ratio continued to remain strong at 5.52 times. In the event that all BaIDS holders of Series 5 exercise their put options to sell their BaIDS to PNSB, the latter would have to meet RM150.0 million BaIDS redemption in October 2009. If the put option holders of Series 5 do not exercise their put, the applicable maturity date will be in 2013 and the next scheduled redemption would be in October 2011 (of RM180.0 million BaIDS Series 3). In the event that noteholders exercise their put options between November 2011 and November 2012, PNSB would have to meet the total principal A Notes outstanding of RM273.4 million on the put date. In the meantime, the third of 10 equal annual redemptions of RM54.69 million is scheduled in November 2009. PNSB debt service reserves of RM301.76 million as at November 30, 2008 are sufficient to meet its near-term debt service obligations.

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