SAJ CAPITAL SDN BHD - 2018

MARC has affirmed its AA-_IS rating on SAJ Capital Sdn Bhd’s (SAJ Capital) Sukuk Murabahah of up to RM650.0 million for up to 12 years. The outlook on the rating is stable.

The rating on SAJ Capital is equated with that of its sister company Ranhill SAJ Sdn Bhd (SAJ) on the basis that the former functions as a single-purpose funding conduit for the sukuk. SAJ Capital and SAJ are held by Ranhill Capital Sdn Bhd (Ranhill Capital), a wholly-owned subsidiary of Ranhill Holdings Berhad.

SAJ’s long track record in operating water assets, its status as the sole distributor of treated water in Johor and its strong financial performance remain key rating factors. Moderating the rating is the timing mismatch of water tariff hikes that have not adhered to agreed timelines, contributing to fluctuating profitability margins.

The stable outlook considers MARC’s expectations that SAJ’s operations will remain on a steady growth trajectory and that the sizeable annual dividend income captured from SAJ into designated accounts would continue to provide healthy debt service buffer to SAJ Capital.

SAJ is currently in its fourth operating period of three years beginning from January 2018 to December 2020 under a 45-year facility agreement (2009-2054) with national water assets owner, Pengurusan Aset Air Berhad (PAAB). SAJ leases water assets from PAAB and collects water tariff payments from consumers in the state through monthly billings. Its aggregate water treatment capacity from 44 water treatment plants stood at 725.1 million m3 per annum as at end-2017. The rating agency notes that SAJ has significantly reduced the state’s non-revenue water (NRW) to 23.9% as at end-March 2018 (2017: 24.7%). The improvement in NRW metrics is a major key performance indicator (KPI) under SAJ’s operating licence. Licensing risk is further mitigated by its stable operating track record in meeting other KPIs as set out by the regulator, the National Water Services Commission (SPAN).

For 2017, SAJ recorded a 4.4% and 11.1% y-o-y increase in revenue and pre-tax profit to RM1.1 billion and RM207.4 million in line with higher volume of water consumption which rose by 2.2% y-o-y to 478.2 million m3. Including lease rentals payable to PAAB, SAJ recorded cash flow from operations (CFO) of RM183.8 million. SAJ has a lean balance sheet as the company is prohibited from incurring borrowings unrelated to its licensed activities. In addition, it does not have any material capex requirement given that PAAB is responsible for funding all development of water assets in the state.

Due to SAJ’s limited capex and stable working capital requirements as well as its debt-free position, SAJ has been paying out an average of above 100.0% of its annual net profit for the past five years. For 2018, SAJ Capital expects to receive about RM88.0 million in dividends that would translate to a finance service coverage ratio (FSCR) of 2.50 times. Beyond 2019, where scheduled notes redemption will commence, SAJ Capital is expected to register an FSCR of between 2.83 times and 4.10 times over the next five years.

MARC’s sensitivity analysis on the company’s cash flows indicates that SAJ’s dividend-paying ability is highly susceptible to the timeliness of water tariff hikes. A one-year delay from a planned 12.6% hike in water tariff in 2018 could effectively reduce SAJ Capital’s dividend income and reduce its FSCR buffer. However, the agreement with PAAB ensures reasonable annual returns (profit after tax) to the operator, which have ranged between 7.0% and 14.0% over the past five years, to be maintained. This means that when water tariff hikes do not proceed as scheduled, PAAB can delay capex activities and therefore SAJ will not incur further lease rental payment obligations. PAAB may also allow discounts on and/or deferment of lease rentals until a rate hike is accorded to the company.

Major Rating Factors

Strengths

• Sole water treatment operator and treated water distributor in Johor;
• Strong operating track record; and
• Stable cash flow generation.

Challenges/Risks

• Timeliness of tariff increases; and
• Licensing risk.