SHC CAPITAL SDN BHD - 2022 |
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| Report ID | 6053890046885 | Popularity | 415 views 27 downloads | |||||
| Report Date | Sep 2022 | Product | ||||||
| Company / Issuer | SHC Capital Sdn Bhd | Sector | Infrastructure & Utilities - Gas District Cooling | |||||
| Price (RM) |
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| Rationale |
Rating action MARC Ratings 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), with a stable outlook. There is no further drawdowns expected in the medium term. Any further drawdowns will require a re-assessment from MARC Ratings. Rationale Wholly owned by Tunas Cool Energy Sdn Bhd (TUNAS), SHC Capital is a special-purpose vehicle set up for the purpose of issuing the sukuk for the parent. TUNAS owns and operates a district cooling system (DCS) plant that generates chilled water for air conditioning for the Pagoh Education Hub (PEH) in Johor. Chilled water is delivered via underground piping 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. TUNAS benefits from a strong business profile with good predictability of revenue and cash flows, driven by the long-term, take-or-pay cooling energy supply contract with the government. This insulates revenue from demand uncertainty as revenue is set at a minimum of approximately RM15.02 million per year for 20 years to 2037. With stable cost profile and strong rate flexibility where TUNAS has the independent ability to pass through cost increases via rate adjustments, visibility over underlying profitability is also good. We expect the company to generate about RM7.0 million to RM9.0 million in operating cash flow a year, sufficient to meet SHC Capital’s debt service under the rated programme. A key risk to this transaction, in our view, is the potential for administrative issues delaying receivable collections. However, billing and collection reports observed to May 2022 show that payments were made in a timely manner. As at end-May 2022, outstanding receivables stood at approximately RM2.5 million, all current and within the extended credit terms. The relevant contracts are also exposed to termination for non-performance. However, we view the contract termination risk as low considering the essential service nature of TUNAS’ chilled water distribution activity, and the DCS plant’s strong operating track record of more than five years. PEH has no ready alternatives for cooling, and the underground pipe network connecting the DCS plant and the buildings serves as a strong barrier to entry, a credit positive for TUNAS. Overall, collections have been timely, and the transaction has performed as expected. As at end-FY2021, SHC Capital’s total cash and cash equivalents stood at RM10.3 million, higher than our rating case forecast of RM7.5 million, and sufficient to meet its 2022 financial obligations of RM8.7 million. Financial service coverage ratio (FSCR) stood at approximately 3.7x at end-2021, well above the covenanted 1.25x. The average projected FSCR through 2037 is 2.2x with a minimum of 1.8x. The forecast is based on what we consider reasonable assumptions that simulate a scenario of a 90-day receivables collection cycle and an increase in operations and maintenance (O&M) costs based on a dispatch factor that is assumed to grow 3% annually to around 80% of the take-or-pay level. 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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