Aliran Ihsan Resources Bhd - 2008 / 2009

MARC has affirmed its A rating on Aliran Ihsan Resources Berhad’s (AIRB) RM56.924 million Redeemable Convertible Unsecured Loan Stocks (RCULS). The rating outlook remains developing to reflect uncertainties arising from the current ongoing industry-wide restructuring that involves among others migration of concessions to a new licensing regime or the option for existing water operators to continue water supply services in accordance to concession agreements subject to authorisation and certain amendments to concessions as may be agreed by the National Water Services Commission (SPAN). The affirmed rating continues to reflect robust water demand in the state of Johor, predictable income stream of its water treatment concessionaire subsidiary, Southern Water Corporation Sdn Bhd (SWC) and associated water treatment concessionaire Equiventures Sdn Bhd (ESB) as well as its strong capital structure evidenced by a low gearing level. These positives are offset by AIRB’s two consecutive years of negative cash flow from operations (CFO) caused by delays in receivable collection from offtakers namely, state-owned entities of Syarikat Air Johor Sdn Bhd (SAJ) and Johor Special Water Sdn Bhd (JSW).

AIRB is the holding company of Johor state water treatment concessionaire SWC (100%-equity interest) together with the latter’s two wholly-owned subsidiaries Southern Water Engineering Sdn Bhd, a waterworks contractor and Southern Water Engineering Sdn Bhd, a water treatment plant operator. AIRB also holds significant interests in another Johor state water treatment concessionaire, ESB (49%) and water treatment plant operator Strategi Tegas (M) Sdn Bhd (STSB) (30%). In November 2008, conglomerate MMC Corporation Berhad (MMC) successfully acquired a 74.36% controlling stake in AIRB by cash, as part of MMC’s plan to become an integrated utilities player and to widen its foothold in Johor. According to MMC’s publicly available take-over offer documents, MMC intends to retain AIRB’s Bursa Malaysia Main Board listing status, its existing business, assets and employees in the immediate term.

Revenue stability is derived from the tariff framework accorded by the concession agreements allowing SWC and ESB to receive fixed monthly payments and variable bulk water charges for the sale of treated water. The variable component of the bulk water tariff is adjusted annually with reference to energy costs and chemicals whilst fixed monthly payment is inflation-adjusted. SWC’s and ESB’s concession will expire in June 2014 and 2012 respectively.

During the 12-month period ended June 30, 2008, revenue increased by 4.2% to RM64.15 million from RM61.67 million in the previous year as a result of bulk sales rate revision in the fourth quarter of 2008 (AIRB changed its financial year end from June 30 to December 31 in February 2008). While AIRB’s revenue remained relatively stable, pre-tax profit was 17.5% lower year-on-year mainly due to its share of loss of RM3.38 million from associated companies in which provisions of RM28.0 million for doubtful debts were made. Nevertheless, this is not expected to be a recurring item. AIRB continues to record cash flow deficits in respect of its CFO. Its cash flow deficit, however, narrowed in the 12-month period ending June 30, 2008 to RM5.05 million compared to RM26.07 million for the corresponding period in 2007. CFO generation continues to be affected by the poor payment performance of state-owned SAJ. MARC understands that SWC has obtained legal judgement against SAJ to recover the outstanding receivables. AIRB’s debt service coverage remains strong at 20.93 times (x) with cash reserves of RM50.62 million while its debt-to-equity ratio stood favourably at 0.13x. For the 18-month period ended December 31, 2008, AIRB recorded cumulative revenue of RM97.23 million and pre-tax profit of RM55.35 million. Its cash reserve of RM57.87 million mitigates to a certain extent MARC’s ongoing concern over the collection risk associated with AIRB’s receivables from SAJ and JSW.

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