CREDIT ANALYSIS REPORT

SHC CAPITAL SDN BHD - 2020

Report ID 605308 Popularity 135 views 41 downloads 
Report Date Nov 2020 Product  
Company / Issuer SHC Capital Sdn Bhd Sector Infrastructure & Utilities - Gas District Cooling
Price (RM)
Normal: RM500.00        
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Rationale
MARC has assigned a preliminary rating of AA-IS to special-purpose vehicle SHC Capital Sdn Bhd’s proposed RM80.0 million issuance under its RM200 million Islamic Medium-Term Notes (Sukuk Wakalah). The rating outlook is stable. There are no expectations of further drawdown in the medium term. Any further drawdown, however, will require a re-assessment on the rating.

TUNAS owns and operates a district cooling system (DCS) plant and underground piping network in Pagoh Education Hub (PEH) in Johor. Chilled water for air conditioning is generated by the plant and distributed through the piping network to four higher learning institutions within PEH pursuant to a 20-year cooling energy supply agreement between the government (via the Ministry of Education) and Sime Darby Property Selatan Satu Sdn Bhd (SDPSS), which the latter subsequently sub-contracted to TUNAS. 

The rating reflects a high degree of visibility of the revenue stream under the long-term supply agreement with the government which expires in 2037, the pass-through nature of operating costs and the positive operating cash flow, albeit moderate in the range of RM7 million to RM9 million p.a. that comfortably addresses the entity’s financial obligations under the rated Sukuk Wakalah. The long-term contractual nature of the revenue with a minimum take-or-pay arrangement provides strong visibility and ensures the stability of future cash flows. Operational risk is low with predictable operations and maintenance (O&M) expenses. TUNAS’ ability to pass through and recover operating cost increases through rate adjustments are also viewed positively. MARC thus expects the company to maintain largely stable operating profits, supported by the contractual take-or-pay agreement and TUNAS’ strong operating cost flexibility.

MARC views the termination of the chilled water supply contract as low given the essentiality of the service TUNAS provides. PEH has no ready alternative for cooling, and the underground pipe network connecting TUNAS’ DCS and the buildings also creates a very strong barrier to entry. TUNAS’ strong operating record since the plant started operations in 2017 also provides protection. 

The transaction is, however, sensitive to payment delays and any unexpected material variations from budgeted O&M expenses that could affect the Issuer’s debt-servicing ability. Nevertheless, the average collection period of 46 days has generally been within credit terms while O&M expenses have largely been balanced. This notwithstanding, MARC’s rating case has applied a longer 90-day collection cycle and a 3% stress to operating expenses. Financial projections through 2037 show an average annual finance service cover ratio (FSCR) of 2.0x and a minimum of 1.6x against the covenanted 1.25x. The sukuk is fully amortising, with annual debt service obligations projected at no more than RM8.72 million (highest in fiscal 2022).

The stable outlook reflects MARC’s expectation of sustained operating performance in the next 12-18 months.

Major Rating Factors

Strengths
  • Strong demand characteristics and cash flow resilience backed by a long-term contract with strong counterparty and a take-or-pay arrangement;
  • Strong market position as sole provider of essential cooling services to four higher learning institutions within Pagoh Education Hub; and
  • Low operating risk levels.
Challenges/Risks
  • Contract termination risk; and
  • Delay in receivables collection. 

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