MALAKOFF POWER BERHAD - 2018

MARC has affirmed its AA-_IS rating on Malakoff Power Berhad’s (MPower) RM5.4 billion Sukuk Murabahah with a stable outlook. MPower is the operations and maintenance (O&M) operator of its parent company Malakoff Corporation Berhad’s (Malakoff) majority-owned domestic power plants.

The rating reflects the consolidated credit profile of MPower and Malakoff in light of the strong operational and financial linkages between both entities. The significant linkages are based on common reliance on the residual cash flows of Malakoff’s power plants and the explicit Kafalah guarantee provided by Malakoff in favour of the sukukholders. The rating is supported by the predictability of cash flows from Malakoff’s power plant portfolio under long-term power purchase agreements (PPA) with Tenaga Nasional Berhad (TNB) (AAA/Stable). Constraining the rating is Malakoff’s high leverage position and the group’s high reliance on residual cash flows from key subsidiaries, Tanjung Bin Power Sdn Bhd (TBP) and Segari Energy Ventures Sdn Bhd (SEV).

In 9M2018, Malakoff group’s revenue rose 2.3% y-o-y to RM5.5 billion mainly due to higher energy payments from TBP and Tanjung Bin Energy Sdn Bhd’s (TBE) coal plants on the back of higher applicable coal prices. This increase is, however, offset by a 16.3% decline in capacity revenue due to SEV’s lower capacity payments following the reduction in tariff under the extended PPA. Cash flow from operations (CFO) was lower at RM1,290.7 million (9M2017: RM1,893.3 million) in line with the lower capacity payments and changes in working capital. Despite the lower CFO, the group’s ending cash balance stood higher at RM5.2 billion (9M2017: RM4.6 billion) due to the repayment of TBE Issuer Berhad’s RM1.3 billion equity bridge loan in the previous year.

As at end-9M2018, Malakoff group’s borrowings stood at RM15.5 billion. The projected additional RM566.8 million of borrowings to finance the proposed acquisition of Alam Flora Sdn Bhd is likely to be gradually offset by the repayment of MPower’s debt totalling RM1.0 billion between 2018 and 2019. MPower pared down RM330.0 million in debts on December 17, 2018. Debt-to-equity (DE) ratio is expected to be in the range of 2.24x to 2.35x over the next 12 to 18 months.

The proposed acquisition of Alam Flora is expected to be earnings accretive with projected annual dividend payouts between 40% and 50% from 2020 onwards. Among Malakoff’s subsidiaries, TBP would remain the major contributor with cumulative projected dividend income and loan stocks income of RM810 million and RM108 million between 2019 and 2021 while debt-free SEV is projected to provide stable dividend income of RM186 million to MPower during this period.

The additional income stream from Alam Flora comes at a crucial juncture in light of the lower capacity payment receipts at SEV and the commencement of repayment on TBP’s senior debt as well as the corresponding step-down in its capacity rate financial in 2H2019. In the circumstance, MARC expects Malakoff to manage its liquidity position prudently in light of hefty sukuk obligations between 2019 and 2021. Given these obligations, Malakoff faces challenges with its projected cash flow coverage in 2020, with a combined finance service cover ratio (with cash) of 2.26x. Malakoff and MPower’s actual combined cash reserves could be lower than forecast as the financial projections have not taken into account any dividend payout from 2019 onwards.

The stable outlook incorporates MARC’s expectation that Malakoff’s power generating subsidiaries will continue to deliver satisfactory operational and financial performance to support the group’s debt obligations. Downward pressure on the rating may emerge if Malakoff’s consolidated DE ratio deviates significantly from the rating agency’s expectation and/or the group’s liquidity position deteriorates sharply as a result of significant outage or performance failure at one or more of its power plants.

Major Rating Factors

Strengths

• Predictable cash flow generation from moderately diversified repayment sources;
• Strong operational track record of Malakoff group; and
• Sound covenants to ensure adequate liquidity coverage.

Challenges/Risks

• High reliance on cash flows from two key subsidiaries; and
• Malakoff group’s low equity base.