Assar Chemicals Sdn Bhd - 2010

MARC has affirmed its rating on Assar Chemicals Sdn Bhd’s (ACSB) RM150 million Serial Sukuk Musyarakah (Sukuk) at AAAIS. The outlook on the ratings has been revised to negative from stable. The outlook revision reflects MARC’s concern over ACSB’s forthcoming August 2011 Sukuk maturity which is likely to exceed its cash reserves and expected free cash flow. The affirmed rating incorporates ACSB’s stable revenue generation supported by the long-term agreement with high credit standing terminal users, namely PETRONAS Dagangan Berhad (PDB) and Shell Timur Sdn Bhd (STSB), as well as prompt collection of monthly payments from the two terminal users.

ACSB is 100%-owned by Assar Senari Sdn Bhd, which is linked to the Sarawak state government through a 20% ownership by Yayasan Sarawak, and was incorporated to undertake the construction of an independent oil terminal (IOT). ACSB signed a Musyarakah contract with the Sukukholders for the purpose of constructing and leasing the IOT, which is located in Senari, Kuching. The Sukuk trustee holds a beneficial interest in the IOT on behalf of the Sukukholders. The IOT is leased to ACSB pursuant to a lease agreement between the Sukuk trustee and ACSB. Contracted monthly tariffs charged to terminal users allow for cost recovery of the project and are the primary source of cash flow for the serial redemption of the Sukuk. The terminal commenced its operations on January 2007, and serves as a centralised storage facility for bulk petroleum products and liquefied petroleum gas. ACSB’s related company IOT Management Sdn Bhd, in which PDB and STSB have direct shareholding of 20% and 10% respectively, was appointed to manage, operate and maintain the oil terminal for a period of 30 years.

ACSB’s financial performance has been relatively stable and within expectations since commencement of IOT’s commercial operation. In the financial year ended December 31, 2009 (FY2009), ACSB recorded revenue of RM25.3 million (FY2008: RM24.9 million), derived from IOT tariff collections. Pre-tax profit remains relatively steady at RM6.8 million (FY2008: RM6.8 million). The operating profit margin is slightly lower than in preceding years, attributed to 6.6% higher administrative and operating expenses, but remained high at 59.2%.  ACSB’s financial results for the first nine months of 2010 (9MFY2010) produced a pre-tax profit of RM6.1 million on the back of revenue of RM19.2 million. Operating margins remained strong at 62.4%, given the relative stability of its operations. Meanwhile, ACSB’s debt leverage decreased as a result of the scheduled redemption of the Sukuk. The debt-to-equity ratio stood at 2.4 times as at year-end 2009 and continued to decline to 2.0 times as at September 2010, below the covenanted level of 4.0 times, also helped by earnings retention.

ACSB’s net cash flow generated from operations before working capital changes stood at RM21.7 million (FY2008: RM21.9 million). There were minimal advances made to its penultimate holding company, Assar Senari Holdings Sdn Bhd (ASHSB), and other related entities during the financial year. Consequently, its finance service coverage ratio (FSCR) improved to 1.5 times in FY2009 compared to 1.3 times in FY2008. However, MARC believes that the company will be challenged to preserve its covenant headroom going forward, as a result of its increasing annual debt repayments. ACSB’s revenues have remained stable but its annual redemption of Sukuk has increased to RM20 million for the four-year period from 2010 through 2013 before peaking at RM25 million in 2014 and 2015.

Although ACSB’s overall financial metrics in the current financial year under review improved year-on-year, MARC notes that ACSB faces challenges in meeting the principal and secondary Sukuk obligations amounting to RM23.4 million in August 2011. Adding the balances in designated accounts as at October 31, 2010 totaling RM10.6 million and assuming that the IOT operations generate monthly free cash flow of RM1.4 million, ACSB would have approximately RM19.8 million available by July 2011 after meeting the profit payment of RM3.4 million in February 2011. ACSB would have to cover any shortfall in the Sukuk Service Account one month prior to the payment date. 

ACSB’s rating faces downward pressure if its liquidity position does not show improvement in the next six to seven months. Furthermore, the ongoing restructuring exercise in Assar Senari group of companies which, among others, resulted in the high turnover of ACSB’s management staff has heightened MARC’s concerns in respect of potential changes in the strategic direction and operational aspects of ACSB. MARC’s ongoing surveillance will focus on ACSB’s plans for addressing its forthcoming debt maturities.

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