Pinnacle Tower Sdn Bhd - 2013

MARC has affirmed its ratings of MARC-1IS and AAAIS on Pinnacle Tower Sdn Bhd’s (Pinnacle Tower) RM50 million Islamic Commercial Papers (ICP) and RM400 million Islamic Medium Term Notes (IMTN) respectively with a stable outlook. The rating action affects RM225 million of outstanding notes issued under the programme.

Pinnacle Tower is a wholly-owned special purpose funding vehicle of Sacofa Sdn Bhd (Sacofa), a 70.51%-owned entity of the State Financial Secretary of Sarawak. Sacofa is engaged in the provision of common telecommunication infrastructure facilities, including all its related businesses. Its main revenue is derived from the rental of towers, bandwidth services and fiber cores.

The affirmed ratings incorporate a refinement to MARC’s analytical approach to rating the notes issued under the programme. The standalone rating of the notes is now based on MARC’s assessment of Sacofa’s overall creditworthiness. Previously, the stand alone rating had largely reflected the quality of the cash flow provided by contractual monthly lease payments from creditworthy telcos for the use of the towers under a ten-year Master Licence Agreement between the telcos and Sacofa. The rating agency acknowledges a strengthening in the standalone creditworthiness of Sacofa, the result of sustained improvement in its operating performance and continued commitment to debt reduction. As the state-backed company responsible for constructing, owning and managing telecommunication towers in Sarawak and providing fibre-optic infrastructure, Sacofa maintains a favourable business risk profile. The debt ratings incorporate two notches of rating uplift for implied state support from the standalone corporate credit rating of Sacofa of AA.
 
The ratings also reflect Sacofa’s strong link with the state government of Sarawak (SGS) given its status as a state-related entity. In addition, the transaction structure has a shareholding maintenance covenant which obliges SGS, rated AAA/Stable based on publicly available information, to maintain a minimum 51% shareholding in Sacofa.

During 2012, Sacofa completed the construction of five towers, resulting in a cumulative total of 610 telecommunication towers (2011: 605). Going forward, Sacofa is projected to construct five new towers per annum. Construction of towers have trended downward due to reduced demand stream from the telcos as most populated areas have been covered. Revenue contributions from tower rental which have benefited  from  an  increase in  multiple tenant leases  is  expected to show  a  flatter growth trajectory.

Bandwidth leasing revenue increased, reflecting higher use of broadband services. Tower rentals contributed 64% of total revenue in the financial year ended December 31, 2012 (FY2012) (FY2011: 67%) while bandwidth leasing revenues contributed 34% (FY2011: 31%). Contribution from the bandwidth segment is expected to increase further post Sacofa’s upgrading of both its on-land and submarine bandwidth networks pursuant to its fiberisation leasing agreements with the telcos.

In 2012, Sacofa registered a 10.3% increase in revenues to RM155.3 million (2011: RM140.8 million), driven by higher tower rental and bandwidth services revenues. Pre-tax profit grew 21.9% to RM84.6 million in 2012 (2011: RM69.4 million) partly attributed to a decline in operating expenses (2012: RM15.5 million; 2011: RM16.1 million). Cash flow from operations (CFO) remained healthy, albeit lower at RM88.0 million (2011: RM93.0 million). Based on Sacofa’s cash flow projections, cash flow generation is expected to be robust with a minimum annual CFO of RM84 million relative to its annual debt repayment of between RM65 million and RM90 million from 2014 to 2016. Sacofa’s projected finance service cover ratio (FSCR) of above 3.88x throughout the remaining tenure of the notes programme should position the company to maintain cash flow protection measures and liquidity position appropriate for its current stand alone rating. Sacofa’s cash balance as at end-March 2013 stood at RM198.7 million. Continued pay down of its debt, meanwhile, has resulted in improved gearing metrics, evidenced by the sustained improvement in its debt-to-equity ratio (end-March 2013: 0.74x; 2012: 0.97x)

The stable outlook reflects the expectation of sustained strong cash flow generation of Sacofa to meet the obligation under the rated facilities and maintenance of its low business risk profile. Additionally, MARC does not envisage a change in support for the company from SGS.

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