CREDIT ANALYSIS REPORT

ALPHA CIRCLE SDN BHD - 2019

Report ID 60438 Popularity 508 views 21 downloads 
Report Date Jan 2020 Product  
Company / Issuer Alpha Circle Sdn Bhd Sector Trading/Services
Price (RM)
Normal: RM500.00        
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Rationale
MARC has affirmed its ratings on Alpha Circle Sdn Bhd’s RM540 million Senior Sukuk Musharakah and RM55 million Junior Sukuk Musharakah at AA-IS and AIS. The ratings outlook has been revised to stable from negative.

The outlook revision incorporates the improvement in the volume of foreign worker permits issued since conclusion of the government-initiated rehiring programme in June 2018. During the 12 months ending June 30, 2019, the number of foreign worker permits issued rose to 2.30 million compared to 1.94 million a year earlier. The increase has substantially eased the rating agency’s concerns on Alpha Circle’s ability to meet its covenanted finance service cover ratio (FSCR) of 1.75x. The ratings affirmation considers the certainty of payments as the government is required to pay NERS Sdn Bhd RM50 for each foreign worker permit issued or renewed. This assured payment is captured in designated accounts to meet the financial obligations under the rated sukuk programmes. Moderating the rating is the high susceptibility to government policies and economic growth that can impact foreign worker recruitment.

Alpha Circle is the funding vehicle of NERS, the contractor for the 12-year Public-Private Partnership (PPP) contract to undertake the registration of foreigners entering and leaving Malaysia. The contract ends in July 2023 after the expiry of the rated programmes. For its services, NERS receives RM50 for every work permit issued to or renewed by a foreign worker. 

For financial year ended June 30, 2019 (FY2019), revenue and operating profit rose to RM113.0 million and RM26.5 million on the back of 2.30 million foreign work permits issued (FY2018: RM94.8 million; RM19.3 million). FSCR for the year stood at 1.80x (FY2018: 1.75x). Based on the cash flow projections for the remaining years of the sukuk tenure, assuming annual foreign work permit issuances of 2.15 million, Alpha Circle’s FSCR would range between 1.76x and 1.87x over the remaining tenure of the programme ending 2023.

MARC notes that in recent years, Alpha Circle’s ability to build a cash buffer to meet the covenanted FSCR had been affected by a decline in the volume of foreign worker permits issued due to government policy changes on foreign worker hires. To support its cash buffer, its shareholder NERS injected RM20.1 million into the project Finance Service Account (FSA) due to the lower-than-expected volume of foreign worker permit issuances. Its shareholder has given an undertaking to make further cash injections should the need arise.

Alpha Circle has eliminated refinancing risk by aligning sukuk maturity with the programme reduction schedule. In November 2019, Alpha Circle refinanced RM110 million sukuk to be in line with the programme reduction schedule. The current outstanding under the senior sukuk is RM230 million and junior sukuk is RM55 million.

Major Rating Factors

Strength
Assured payment stream from the government.

Challenges/Risks
Highly susceptible to government policy on foreign worker recruitment; and
Foreign worker recruitment linked to the strength of the domestic economy.
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