SENARI SYNERGY SDN BHD - 2017

MARC has affirmed its AAA_IS(fg) rating on Sarawak-based investment holding company Senari Synergy Sdn Bhd’s (Senari Synergy) RM380 million Islamic Medium-Term Notes (IMTN) Programme with a stable outlook. The rating and outlook hinge on an unconditional and irrevocable guarantee provided by Danajamin Nasional Berhad (Danajamin) on the IMTN obligations. Danajamin carries a financial insurer rating of AAA with a stable outlook from MARC.

Senari Synergy’s standalone credit profile incorporates its long-term contracts with credible oil & gas offtakers, its large financial obligations and the impact from poor-performing subsidiaries. The 30-year offtake agreements with PETRONAS Dagangan Berhad and Shell Timur Sdn Bhd for storing and distributing petroleum-based products through an independent oil terminal (IOT) in Kuching and a centralised oil distribution terminal (CODT) in Tanjung Manis respectively generate modest cashflows. The IOT and CODT are owned and operated by subsidiaries Assar Chemicals Sdn Bhd (ACSB) and Assar Chemicals Dua Sdn Bhd respectively. Given the guaranteed pre-tax internal rate of return on equity of 15% regardless of the throughput volume under the agreements, the oil terminals’ operations are insulated from demand and termination risks. However, following the downward revision of ACSB’s IOT tariff in its tenth contract year, its revenue declined by 48.6% y-o-y to RM15.3 million in 2016.

The performance of Senari Synergy’s other subsidiaries, particularly in the port-related services, industrial and property development segments, remained modest in 2016. The company is in the midst of disposing of its loss-making subsidiary Assar Refinery Services Sdn Bhd (ARSSB) by end-2017 although net losses narrowed to RM6.5 million in 2016 from negative RM9.5 million. ARSSB currently concentrates on the trading of crude palm oil and providing bulking facilities following the discontinuation of its refinery operations in 2013. Senari Synergy has fully impaired its investment cost in ARSSB in 2015.

In 2016, Senari Synergy’s revenue declined to RM312.0 million from RM468.3 million in the previous year, partly arising partly from the revision of ACSB’s IOT tariff and a lower contribution by ARSSB. The group’s free cash flow stood lower at RM67.4 million (2015: RM88.5 million). Notwithstanding the fact that Senari Synergy’s shareholders have advanced a sum of RM37.5 million to the group, a higher net repayment of ARSSB’s bankers’ acceptance of RM63.9 million (2015: RM9.6 million) during the year depleted its cash balance to RM18.9 million (2015: RM80.2 million). Following a repayment of RM35.0 million of IMTN and RM6.0 million in term loans, total group borrowings declined to RM327.2 million (2015: RM432.0 million).

However, the widening accumulated losses of RM92.9 million have reduced the group’s shareholders’ equity to RM39.0 million (2015: RM50.5 million), leading to a higher adjusted debt-to-equity (DE) ratio of 2.80 times in 2016 (2015: 2.59 times).

At the holding company level, Senari Synergy received RM9.0 million in dividends and RM15.1 million in interest income from its subsidiaries. Its cash and cash equivalents of RM6.5 million after meeting the net IMTN principal repayment of RM35.0 million and total finance cost of RM17.7 million remains low. In view of the underwhelming performance of Senari Synergy’s non-core subsidiaries and limited business growth of its core subsidiaries, Senari Synergy may have to rely on its shareholders’ advances in the short term to meet its financial obligations. As a result of its weak cash position, Senari Synergy rolled over RM20.0 million IMTNs of the rated programme in August 2017 with the remaining repaid with short-term borrowings.

MARC notes that Senari Synergy faces significant refinancing risk in 2018 as it potentially faces a large repayment of RM240 million in August 2018 given its limited financial flexibility under the existing programme. MARC expects Senari Synergy to commence its refinancing exercise soon with a new programme that has a lengthened maturity profile to better match its debt repayment capacity.

Any downside risks on Senari Synergy’s credit profile are mitigated by the irrevocable and unconditional guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

Major Rating Factors

Strengths

• Revenue secured by long-term contracts with a guaranteed pre-tax internal rate of return on equity for the oil terminal segment; and
• Primary offtakers have strong credit and business profiles.

Challenges/Risks

• Underperforming subsidiaries;
• Limited growth in core business activities; and
• Refinancing risk due to lumpy repayment in 2018.