Senari Synergy Sdn Bhd - 2014

MARC has affirmed its AAAIS(fg) rating on investment holding company Senari Synergy Sdn Bhd’s (Senari Synergy) RM380 million Islamic Medium-Term Notes (IMTN) Programme with a stable outlook. The affirmed rating and outlook reflect the credit strength of an unconditional and irrevocable guarantee on the IMTN obligations provided by Danajamin Nasional Berhad (Danajamin) which carries a financial insurer rating of AAA with a stable outlook from MARC.
 
Sarawak-based Senari Synergy’s standalone profile is largely reliant on the performance of its key subsidiaries involved in operations of oil terminals; its port facilities and property development activities have continued to register weak performance. The group operates an independent oil terminal (IOT) at its Assar Senari Industrial Complex I (ASIC I) in Kuching and a centralised oil distribution terminal (CODT) at its Assar Senari Industrial Complex II (ASIC II) in Tanjung Manis. The IOT and CODT, both of which are storage and distribution facilities for bulk petroleum and related products, generate the bulk of the group’s operational cash flow. The performance is underpinned by 30-year offtaker agreements with Petronas Dagangan Berhad and Shell Timur Sdn Bhd for the utilisation of the terminal facilities. Nonetheless, while cash flow from the IOT has been stable, cash flow from the CODT was affected by protracted negotiations with the two offtakers over tariffs, resulting in lower cash flow from CODT being received.

MARC notes that the CODT tariff issue was resolved in November 2013 with a new agreement that includes revised CODT tariffs to align with the IOT’s current tariff structure which ensures a pre-tax internal rate of return on equity of 15% regardless of throughput volume. The long-term agreement and its stipulated IOT and CODT tariffs insulate the terminal operations from termination and demand risks. For 2013, the group posted lower revenue of RM64.6 million (2012: RM74.1 million), mainly attributed to a one-off adjustment on tariff revenue due to the revised CODT tariffs. Despite the lower revenue, the group’s cash flow from operations (CFO) increased to RM45.9 million (2012: RM31.2 million) due to the recovery of a substantial portion of its trade receivables from the offtakers following the finalisation of the CODT tariffs. The group’s free cash flow (FCF) improved to RM44.5 million as at end-2013 (2012: RM27.2 million) despite a payment of RM13.6 million for the acquisition at the remaining stake in a subsidiary.

Senari Synergy’s group cash and cash equivalents declined to RM49.0 million (2012: RM83.4 million) while the finance service cover ratio (FSCR) stood at a modest 1.98 times on account of a RM45.0 million debt repayment due in 2013 (2012: 7.79 times). Debt protection measures could further weaken as Senari Synergy’s scheduled principal redemptions which range between RM35 million to RM40 million annually until 2017 are met. With the group’s total borrowings of RM364.9 million against total shareholders’ fund (including retained earnings adjustment of subsidiary Assar Refinery Services Sdn Bhd) of RM149.5 million, Senari Synergy’s debt-to-equity (DE) ratio stood at 2.14 times as at end-2013, (2012: 2.22 times). For 1H2014, the group rolled over RM20.0 million IMTNs under the first tranche of the rated programme in the period.

At the holding company level, Senari Synergy relies on dividends and repayment of borrowings from subsidiaries to meet its obligations. In 2013, Senari Synergy received dividend income and intercompany repayments of RM11.1 million and RM26.3 million respectively. Coupled with cash balances, it was able to meet the IMTN profit payment and financial guarantee fees amounting to RM21.8 million and the principal repayment of the IMTN programme of RM35 million and revolving credit facility of RM10 million.  Although Senari Synergy’s debt repayment in 2013 led to a decline in DE ratio to 2.62 times from 3.05 times in the previous year, its leverage position remains high.

Nonetheless, noteholders are insulated from any downside risks related to the credit profile of Senari Synergy by the irrevocable and unconditional guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will hinge largely on changes in Danajamin’s credit strength.

Major Rating Factors

Strengths

• Cash flow from oil terminals secured by long-term contracts; and
• Strong credit profile of primary offtakers which are PETRONAS and Shell’s subsidiaries.

Challenges/Risks

• Need to strengthen the performance of several weak subsidiaries;
• Limited growth of business activities; and
• Refinancing risk due to lumpy repayment in 2018.