MARC Ratings has assigned ratings of MARC-1_IS/AA_IS to Alam Flora Sdn Bhd’s RM700 million Islamic Commercial Papers and Islamic Medium-Term Notes (ICP/IMTN) programmes with a stable outlook. 

The assigned ratings are primarily driven by the strength of Alam Flora’s long-term concession agreement (CA) with the Government of Malaysia that provides revenue visibility until 2033. The ratings also incorporate the group’s expertise and lengthy operational track record, as well as its predictable cash flow generation and robust liquidity position. These factors are moderated by execution risk on its non-concession business and by its moderate equity base relative to the proposed sukuk.

Incorporated in 1995, Alam Flora provides waste collection and public cleansing services (concession business) to Kuala Lumpur, Putrajaya and Pahang. Through its subsidiary Alam Flora Environmental Solutions Sdn Bhd (AFES), the group also undertakes non-concession business encompassing waste processing and solutions, integrated facility management and recycling activities. Of its two business segments, the concession business, which made up about 89% and 96% of group revenue and operating profit in 2021, will remain Alam Flora’s key revenue and earnings driver in the foreseeable future. Notwithstanding this, about 50% of the proceeds from the proposed sukuk issuances have been earmarked for four projects under its non-concession business to drive growth while the rest of the proceeds will be utilised to replace ageing concession assets.

MARC Ratings notes that under the CA, Alam Flora receives monthly fixed-rate fees based on the type and number of premises within a scheme area for carrying out its services. As with other concession-driven businesses, its operations are monitored and aligned with key performance indicators (KPI). In this regard, the rating agency observes that Alam Flora has a strong operational track record, meeting its KPIs and incurring minimal penalties over the years. Payments are received on a fairly timely basis, underscoring the low counterparty risk of Solid Waste and Public Cleasing Management Corporation (SWCorp), a government supervisory body under the Ministry of Housing and Local Government overseeing the concessionaire.  Given the operational performance, MARC Ratings opines that concession termination risk is low and at the same time, the case for concession renewal upon expiry is strong. 

Over the medium term, concession revenue is expected to grow by a modest 2%-3% p.a. in line with the opening of new developments in geographical areas under Alam Flora’s purview. Therefore, any sharp revenue growth would be led by its non-concession business which would include upcoming waste treatment recovery facilities in Selangor and Johor, scheduled waste management facilities in Perak and Terengganu, and other ongoing associated activities. While the group is exposed to project execution risk, the new projects are related to waste treatment and recovery processes that are within its technical scope, and therefore associated risks are mitigated. 

In MARC Ratings’ assessment, cash flows from the concession business alone is deemed sufficient to meet sukuk obligations with minimum and average finance service coverage ratios (FSCR) of 3.62x and 6.51x. Successful execution of new non-concession-based projects would expand revenue contribution from the non-concession segment to 30% in 2026 from the current 11% and increase the group’s average revenue growth to 4.6% over the next five years. Based on the financial projections, profit margin is expected to be around 16% to 18% in the next three years, benefitting from continued cost management initiatives. With cash flow from operations (CFO) projected at about RM150.0 million p.a., CFO interest and debt coverages would be healthy at 8.0x-9.0x and 0.3x-0.5x over the next five years. 

Alam Flora currently maintains a debt-free capital structure. The sukuk will be issued on a staggered basis, with the group’s net debt-to-equity (DE) ratio projected to peak at 0.65x in 2025 before gradually reducing from 2026 onwards. MARC Ratings observes that Alam Flora has maintained a strong liquidity position, with cash balances standing at RM441.7 million as at end-2021. We note that the proposed programme tenure expires in 30 years; this is not viewed as a key risk since the four planned sukuk issuances between 2022-2025 are structured to be fully repaid within the remaining concession period. However, any further issuances with repayments beyond the current CA period could introduce repayment risk if the CA is not renewed and/or if other mitigating factors are not in place. 

The stable outlook reflects our expectation that the group will meet all obligations under the CA to generate steady cash flow for sukuk repayments.

We do not currently foresee any near-term upgrades to the current rating, particularly given the moderate equity base that reduces the headroom for leverage position. 

Rating pressure would arise if performance obligations under the CA were to be affected which would have  material impact on cash flow generation and credit profile.