CREDIT ANALYSIS REPORT

TTM SUKUK BERHAD - 2018

Report ID 5874 Popularity 1167 views 43 downloads 
Report Date Feb 2019 Product  
Company / Issuer TTM Sukuk Berhad Sector Infrastructure & Utilities - Oil & Gas
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its AAAIS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah with a stable outlook. The outstanding sukuk amounted to RM400 million as at end-December 2018.

The affirmed rating reflects MARC’s assessment of a very high likelihood of support from project sponsors, Petroliam Nasional Berhad (PETRONAS) and PTT Public Company Ltd (PTT), based on their strategic and vested interests to ensure the success of the government-to-government Trans Thailand-Malaysia (TTM) project. PETRONAS and PTT are the national oil companies of Malaysia and Thailand.

TTM SPV is a funding vehicle for the second phase of the TTM project (TTM Phase II), consisting of two gas pipelines between the Malaysia-Thailand Joint Development Area (JDA) and the industrial city of Rayong in Thailand. TTM SPV is wholly owned by Trans Thai-Malaysia (Thailand) Ltd (TTMT), a 50:50 joint-venture company of PETRONAS and PTT. The rating also considers the credit linkages in the form of cross-acceleration and cross-default provisions between the rated sukuk and the term loan taken to finance the first phase of the TTM project (TTM Phase I) of which PETRONAS is the main offtaker.

The stable outlook reflects MARC’s expectation of TTMT’s satisfactory operating performance and the project sponsors’ continued commitment to the project. Any significant weakness in TTMT’s credit metrics and/or decline in the TTM project’s strategic importance to the project sponsors would exert pressure on the rating.

Although PTT and TTMT are domiciled in Thailand, and the project revenue of TTM Phase II is denominated in US dollars or its Thai baht equivalent, MARC does not consider the rating to be constrained by Thailand’s foreign currency rating. This assessment is based on the rating agency’s view that PETRONAS has a strong incentive to provide ringgit liquidity in the event of transfer and convertibility issues arising from any foreign exchange restrictions imposed by the Thai government. PETRONAS has a senior unsecured rating of AAA/Stable from MARC, based on publicly available information.

The project’s standalone credit profile is supported by the stable and predictable nature of project cash flow on the back of a cost-plus tariff structure under the long-term service agreements with PTT and PETRONAS. TTMT’s availability-based capacity revenue is calculated based on the unit capacity reservation charge (UCRC) that incorporates operating costs and finance service obligations in addition to providing adequate shareholders’ return. TTM Phase II’s revenue declined to US$8.1 million in 1H2018 and US$18.1 million in 2017 (2016: US$18.8 million) on the back of lower gas sales volumes. Despite the revenue decline, TTM Phase II’s operating profit margin remained stable at around 61.2% and 63.6% in 1H2018 and 2017 (1H2017: 64.8%; 2016: 63.3%). Cash flow generation remained adequate to meet its debt service with an annual finance service coverage ratio (AFSCR) of 1.10x in 2017. While the AFSCR is just within the covenanted requirement of 1.10x, MARC notes that this ratio has continued to decline in recent years as TTM Phase II has maintained large dividend payouts even as its profitability declined. The rating agency opines that as dividend payments are discretionary in nature, the company should exercise greater discipline to ensure that sufficient buffer is maintained with respect to its AFSCR.

At the company level, TTMT recorded slightly lower revenue of US$91.6 million in 2017 on lower gas sales volumes but posted higher pre-tax profit of US$34.5 million, representing a 13.9% y-o-y growth due to foreign exchange gains as well as lower administrative expenses. TTMT’s cash flow from operations (CFO) was 5.9% lower y-o-y at US$96.0 million in 2017 despite recording a higher profit, as the gains were largely driven by non-cash items.

As at end-2017, TTMT’s outstanding borrowings were lower at US$318.7 million (2016: US$356.3 million) as it pared down some of its long-term loans from financial institutions, while total shareholders’ funds marginally increased to US$265.7 million. This led to an improvement in its leverage ratio to 1.19x compared to 1.35x in 2016, which was well within the covenanted debt-to equity (DE) ratio of 2.33x.

Major Rating Factors

Strengths

  • Highly predictable and stable cash flow over the sukuk tenure;
  • Very strong creditworthiness of ultimate project owners; and
  • Project’s strategic importance to Thailand and Malaysia.

Challenge/Risk

  • Foreign exchange risk.
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