SHC CAPITAL SDN BHD - 2023 |
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| Report ID | 60538900469553 | Popularity | 206 views 21 downloads | |||||
| Report Date | Oct 2023 | 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 RM80.0 million issuance under its RM200 million Islamic Medium-Term Notes (Sukuk Wakalah) Programme with a stable outlook. There is no further drawdown expected, but any drawdown will require a reassessment of the rating. Rationale SHC Capital is a wholly-owned funding vehicle of Tunas Cool Energy Sdn Bhd (TUNAS), a subsidiary of Sin Heng Chan (Malaya) Berhad. TUNAS owns and operates a district cooling system (DCS) plant that generates and distributes chilled water for air conditioning to four higher learning institutions within the Pagoh Education Hub (PEH) in Johor. This is pursuant to a 20-year supply contract between the government (via the Ministry of Education) and Sime Darby Property Selatan Satu Sdn Bhd (SDPSS). SDPSS subsequently contracted TUNAS to implement and supply chilled water to PEH. 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 through 2037. With a 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 around 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 risk to this transaction, however, is the potential for administrative issues delaying receivable collections. However, billing and collection reports observed as of June 2023 show that payments were made in a timely manner. As at end-June 2023, outstanding receivables totalled approximately RM3.8 million. Of this, 80% were current while overdue receivables (over 45 days) stood at RM855,000, which we consider manageable. The relevant contracts are also exposed to termination for non-performance. However, we opine contract termination risk is low considering the good operational track record of the DCS plant to date, and the essential chilled water distribution services that the company provides. 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, the transaction has performed somewhat better than expected. Cash and cash equivalents as at end-FY2022 were higher than expected at RM12.2 million (forecast: RM7.4 million), helped by lower operating expenditure, which came in 14.6% below forecast (driven by the current low dispatch factor). As at end-May 2023, cash stood at RM14.4 million, sufficient to meet SHC Capital’s financial obligations of RM8.5 million this year. Finance service cover ratio (FSCR) stood at approximately 2.4x as at end-2022, above the covenanted 1.25x. The average projected FSCR through 2037 is 2.3x with a minimum of 1.9x. 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 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 level 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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