SHC CAPITAL SDN BHD - 2021 |
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| Report ID | 60538900391 | Popularity | 651 views 40 downloads | |||||
| Report Date | Nov 2021 | Product | ||||||
| Company / Issuer | SHC Capital Sdn Bhd | Sector | Infrastructure & Utilities - Gas District Cooling | |||||
| Price (RM) |
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| Rationale |
Rating action MARC has affirmed its AA-IS rating on SHC Capital Sdn Bhd’s (SHC Capital) RM80.0 million sukuk issued under its RM200 million Islamic Medium-Term Notes Programme (Sukuk Wakalah). The rating outlook is stable. There are no expectations of further drawdowns in the medium term. Any further drawdowns will require a re-assessment from MARC. Rationale SHC Capital is 100%-owned by Tunas Cool Energy Sdn Bhd (TUNAS) and is a special-purpose vehicle set up solely for the purpose of issuing the sukuk for the parent. TUNAS owns and operates a district cooling system (DCS) plant and underground piping that generates and distributes chilled water to the Pagoh Education Hub (PEH) in Johor. Chilled water for air conditioning is provided to four higher learning institutions within PEH pursuant to a 20-year supply contract 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 stable cash flow profile supported by revenue from a long-term cooling energy supply agreement with the government on a minimum take-or-pay arrangement expiring in 2037. We expect the company to generate RM7 million to RM9 million of operational cash flow a year, sufficient to meet SHC Capital’s debt service under the rated programme. The transaction is sensitive to payment delays and any unexpected material variations from budgeted operations and maintenance (O&M) expenses. However, billing and collection reports up to August 2021 indicate no major collection risk; as at end-August 2021, outstanding receivables stood at approximately RM2.5 million and all were current, in line with the credit terms extended under the relevant agreements. This notwithstanding, our rating case — incorporating a longer 90-day collection cycle from the government and a 3% stress to operating expenses — envisages an average annual finance service cover ratio (FSCR) of 2.2x and a minimum of 1.8x against a covenant of 1.25x. The sukuk is fully amortising, with annual debt service obligations projected at no more than RM8.7 million (highest in fiscal 2022). Operational risk is low; performance requirements are not onerous, and O&M expenses are largely predictable. Stable cost profile and independent ability to pass through cost increases via rate adjustments should ensure steady operating profits. Contract termination risk is also low in view of the essentiality of the service TUNAS provides and the DCS plant’s strong operating track record. PEH has no ready alternative for cooling, and the underground pipe network connecting the plant and the buildings also creates a very strong barrier to entry. Rating outlook The stable outlook reflects our expectation of a sustained operating performance supported by stable, long-term contracted revenue with a strong offtaker in the form of the government. Rating trajectory Upside scenario A positive rating action is unlikely in the short term. Any upgrade will require a significant improvement in volume demand well above the minimum take-or-pay levels on a consistent basis and strengthening of coverage metrics. Downside scenario Unexpected collection delays and/or a material increase in operating costs leading to an adverse change in the company’s operating and financial profile. Key strengths
Key risks
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