CREDIT ANALYSIS REPORT

Alpha Circle Sdn Bhd - 2013

Report ID 4652 Popularity 2108 views 145 downloads 
Report Date Nov 2013 Product  
Company / Issuer Alpha Circle Sdn Bhd Sector Trading/Services
Price (RM)
Normal: RM500.00        
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Rationale

MARC has assigned ratings of AA-IS and AIS on special purpose company Alpha Circle Sdn Bhd’s (Alpha Circle) proposed RM540 million Senior Sukuk Musharakah (Senior Sukuk) and RM55 million Junior Sukuk Musharakah (Junior Sukuk) respectively under the Sukuk Musharakah programme. The ratings carry a stable outlook. The two-notch rating differential between the Senior Sukuk and the Junior Sukuk reflects the latter’s subordinated ranking in priority of payment and security.

The proceeds from the sukuk issuance under the Sukuk Musharakah programme will be largely utilised to fully redeem Alpha Circle’s outstanding RM350 million under the existing Musharakah Medium Term Notes (MMTN) programme. The MMTNs were issued in January 2012 to finance the implementation of its parent NERS Sdn Bhd’s (NERS) National Enforcement and Registration System project (NERS project) under a 12-year Public-Private Partnership (PPP) contract awarded by the Government of Malaysia (GoM) in July 2011. The balance of the proceeds under the programme will be partly used to fund NERS’ contractual obligations of RM160 million to S5 Systems Sdn Bhd (S5S), the support and maintenance service provider for the NERS project, with the remainder utilised for working capital.    

The assigned ratings incorporate the successful implementation of the critical phase of the NERS project in 2011, the operational track record of the NERS project which provides a secured registration system of foreigners in Malaysia and the credit quality of the payment stream received from GoM. MARC also considers the adequacy of NERS’ projected cash flows to meet its financial obligations under the rated Sukuk Musharakah programme. The ratings are, however, constrained by the susceptibility of project cash flows to the volume of legal foreign worker inflows which is reliant on economic conditions and government policies on foreign labour.

NERS’ revenue is highly correlated to the volume of legal foreign workers in the country as it receives a RM50 payment from GoM for each legal foreign worker permit issued/renewed by the Immigration Department of Malaysia (JIM). MARC notes that since the commencement of operations in June 2011, JIM has issued a 12.7% higher monthly average foreign worker permits from an initial forecast of 156,667 per month. As at end-December 2012, the total legal foreign labour force is estimated to have grown past 2.0 million from 1.88 million as at end-December 2010. The trend of higher registration of foreign workers since the implementation of the NERS project has strengthened the project’s cash flow; nonetheless, the financial obligations from Alpha Circle’s higher borrowings of RM595 million under the proposed Sukuk Musharakah programme would to an extent offset any improvement in cash flow metrics.

MARC considers the structural enhancements of the proposed Sukuk Musharakah programme vis-a-vis the existing MMTN programme to be adequate to mitigate concerns on Alpha Circle’s increased debt level. Under the supplementary support and maintenance services agreement between NERS and S5S, the revenue shared between NERS and S5S has been revised to 80:20 from 60:40. As a consequence, 80% of the revenue, as opposed to 60% previously, will now be captured in the financial service account (FSA) towards meeting profit and principal payments under the new sukuk programme. Additionally, a higher minimum amount of RM5.00 million per month will also be deposited into the FSA compared to the previous minimum amount of RM3.75 million under the MMTN programme. MARC views this higher initial cash build-up to be a rating positive as it provides a buffer to volume risk associated with foreign worker inflows at the later stage of the programme.

MARC’s sensitivity analysis reveals that Alpha Circle’s cash flow projections can withstand moderate foreign worker volume reductions before its minimum finance service cover ratio (FSCR) of 1.75 times is breached. Notwithstanding this, any sudden and sharp reversals in the volume of legal foreign workers sustained over a period of time will negatively impact project cash flows, although this scenario is envisaged under significant government policy reversals on migrant labour and/or severely adverse economic conditions. MARC also considers the operational risks to be mitigated by the moderate complexity of the NERS project and the support provided by S5S in carrying out its obligations under the terms of the agreement. MARC notes that any early termination of the project by the government would lead to an accelerated repayment of the outstanding sukuk which is expected to be addressed by government compensation.

For the financial year ended June 31, 2012 (FY2012), NERS posted year-on-year sharp revenue increase to RM149.2 million in line with full operations during the year. However, the company registered a pre-tax loss of RM1.7 million due mainly to implementation costs, high depreciation expenses and finance charges incurred from the issuance of RM380.0 million MMTNs. MARC expects revenue to increase in the near term on the back of higher legal foreign worker registrations although the finance costs arising from the larger borrowing amount would weigh on NERS’ earnings. MARC does not envisage NERS to undertake significant capital expenditure in the near term although the company will continue to install the NERS registration system at other identified sites as required by the government.

The stable outlook reflects MARC’s expectations that NERS will sustain its business and financial profiles by meeting its obligations under the concession terms. Downward rating pressure could develop if the volume of annual foreign work permits falls short of projections.

Major Rating Factors

Strengths

  • Payment from the Malaysian government; and
  • Full implementation of critical phase of the project.

Challenges/Risks

  • Project cash flow dependent on sustainable foreign worker inflows; and
  • Volume of foreign workers susceptible to economic conditions and government policies. 
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