MARC Ratings has affirmed its MARC-1_IS/AA_IS ratings on Alam Flora Sdn Bhd’s RM700 million Islamic Commercial Papers and Islamic Medium-Term Notes (ICP/IMTN) programmes with a stable outlook. There is currently RM1.0 million outstanding under the programmes.

Alam Flora provides waste collection and public cleansing services (concession business) to Kuala Lumpur, Putrajaya and Pahang under a 22-year concession agreement (CA) until August 31, 2033. 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. The concession business, which made up about 87% and 98% of group revenue and operating profit in 2022, remains the key revenue and earnings driver.

The ratings affirmation remains underpinned by the strength of Alam Flora’s long-term CA with the Government of Malaysia that provides revenue visibility. The affirmation also incorporates 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, among which are the construction of a material recovery facility in Selangor and port reception facilities in Johor and Penang, and the development of three other projects (an integrated eco-recovery complex, and two scheduled waste management facilities). The ratings also consider Alam Flora’s moderate equity base relative to the size of the sukuk programme.

Group revenue grew by 5.1% y-o-y to RM869.4 million in 2022, mainly through the addition of new developmental areas and ad-hoc services under its concession business. These consist of housing developments in areas such as Cheras, Bukit Bintang and Kepong, while ad-hoc services encompass waste collection and public cleansing for flood-affected areas as well as events such as the Ramadhan bazaars and Floria. Growth was also supported by contributions from new private waste collection and public cleansing contracts and increased recycling activities under the non-concession business. Pre-tax profit stood at RM140.7 million, slightly below expectations due to higher non-concession fleet costs to operate the transfer station and leachate treatment plant. We note that the operations & maintenance (O&M) contract for these facilities expired in June 2023 and will not be renewed as they will be decommissioned. These facilities contributed to about 3.5% of the group’s revenue in 2022. This revenue loss is expected to be offset by growth in its concession business in 2023.

Revenue growth is expected to be around 6%-9% between 2024 and 2026 as its new non-concession projects come online. By 2026, the non-concession business is expected to contribute roughly RM259.1 million or 24% of group revenue (2022: RM113.9 million, 13%).

Cash flow from operations (CFO) was lower at RM69.2 million during the period mainly due to timing of payment collection from a government counterparty. Post-sukuk issuances between 2H2023-2025, Alam Flora is expected to maintain a strong CFO interest and debt coverage of around 8.0x-9.0x and 0.3x-0.4x over the next five years. The group has a healthy liquidity position with RM307.9 million in cash and bank balances as at end-2022. 

As at end-2022, the group’s capital structure remained debt-free. The group’s net debt-to-equity (DE) ratio is projected to peak at 0.8x before gradually reducing from 2026 onwards. We note that the programme tenure expires in 30 years; this is not viewed as a key risk since its planned sukuk issuances 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.