AZRB CAPITAL SDN BHD - 2019 |
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Report ID | 6000 | Popularity | 1292 views 135 downloads | |||||
Report Date | Sep 2019 | Product | ||||||
Company / Issuer | AZRB Capital Sdn Bhd | Sector | Infrastructure & Utilities | |||||
Price (RM) |
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Rationale |
MARC has assigned a final rating of AA-IS to special purpose
vehicle AZRB Capital Sdn Bhd’s (ACSB) proposed issuance of up to RM535.0
million Islamic Medium-Term Notes (Sukuk Murabahah) with a stable outlook. Wholly owned by Bursa Malaysia-listed Ahmad Zaki Resources Berhad
(AZRB), ACSB was set up to issue the proposed Sukuk Murabahah, proceeds of
which will be on-lent to parent AZRB which would in turn utilise the sum (1) to
subscribe to Shariah-compliant Redeemable Convertible Preference Shares
(RCPS-i) to be issued by its wholly-owned subsidiary, Peninsular Medical Sdn
Bhd (PMSB), amounting to RM344.0 million and (2) the balance for general
working capital purposes. PMSB holds the concession to design, build and maintain a 300-bed
teaching hospital for the International Islamic University of Malaysia (IIUM).
The concession agreement expires in 2038, later than the sukuk maturity in
2031. The construction of the teaching hospital (IIUM Medical Centre) in Kuantan
was completed in 2016 following which PMSB has been receiving concession
receivables in the form of availability payments and maintenance charges. The assigned rating considers the assured payment stream through
the concession receivables from the Malaysian government as sufficient to meet
the financial obligations under the proposed sukuk. The concession receivables
from PMSB will be channelled to the issuer’s designated accounts for the sukuk
payment obligations. The rating is also supported by the absence of
construction completion risk as the IIUM Medical Centre is already operational
and is in the third year of its asset management phase. Moderating the rating
are (1) the transaction structure that necessitates fulfilment of several
intercompany financing obligations involving ACSB, AZRB and PMSB, and (2) the
moderate credit profile of sponsor-cum-shareholder AZRB which will provide a
Kafalah guarantee on all payment obligations of the issuer. PMSB will repay its existing borrowings using proceeds from the
RCPS-i, and concurrently transfer all existing cash in its project account and
future concession receivables to ACSB’s collection account towards meeting the
financial obligations under the proposed sukuk. All securities including shares
of PMSB as well as rights and benefits to the intercompany financing agreements
will be charged and/or assigned for the benefit of the security agent. ACSB will receive a total of about RM1,768.7 million in concession
receivables from PMSB during the tenure of the proposed Sukuk Murabahah. The
rating agency also notes that an amount transferred on a monthly basis to PMSB
to undertake maintenance services will be limited to an annual asset
maintenance budget set for the entire sukuk tenure. Any shortfall in this regard
will be borne by AZRB. Maintenance services for the IIUM Medical Centre are
undertaken by Advance Pact Sdn Bhd, a provider of such services for 22
government hospitals domestically and other hospitals in the Middle East
region. The maintenance services are carried out under a long-term contract
between PMSB and Advance Pact, covering the asset maintenance period. The
rating agency understands that there has been no breach in Advance Pact’s
obligations at the IIUM Medical Centre as of date. In respect of the holding company, AZRB has an established track
record in the engineering and construction (E&C) sector and has expanded to
the property, concession, plantation, as well as oil and gas sectors. For 2018,
revenue grew by a strong 27.9% y-o-y to RM1,228.6 million, driven mostly by
E&C activities. However, margin compression due to construction cost
increase led to a sharp decline in pre-tax profit to RM24.8 million. The weak
profitability trend is expected to persist in 2019. AZRB’s major project, the
36.16-km East Klang Valley Expressway (EKVE), is undertaken by wholly-owned
subsidiary EKVE Sdn Bhd, which is the concessionaire of the expressway.
Completion is expected by July 2020 with the construction cost estimated at
about RM1.55 billion. As a result of the project finance debt, AZRB’s
borrowings remain high at RM2.6 billion as at end-1Q2019. Excluding the
project-related financing, the group’s net DE ratio would stand at about 0.73x
against total equity of RM473 million as at end-December 2018. The stable outlook incorporates MARC’s expectation that the
concession receivables to ACSB will be sufficient to meet its contractual
obligations under the transaction structure and that the credit profile of its
parent remains within expectations. Major Rating Factors Strengths
Challenges/Risks
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