MARC Ratings has affirmed its AA-_IS rating on SAJ Capital Sdn Bhd’s Sukuk Murabahah of up to RM650.0 million with a stable outlook. Total outstanding under the sukuk as at end-July 2023 is RM470 million.

SAJ Capital is a wholly-owned funding vehicle of Ranhill Capital Sdn Bhd, which owns an 80% stake in Ranhill SAJ Sdn Bhd, the exclusive provider of source-to-tap water in Johor. As the dividends from Ranhill SAJ form the source of the profit payments and principal repayments of the sukuk, the rating reflects its credit strength.  

The rating is primarily driven by Ranhill SAJ’s strong business position as the exclusive provider of essential treated water in Johor, with a population estimated at 4.01 million in 2022. Water consumption has been largely steady over the years, rising 3% per annum over the last five years, excluding periods impacted by the pandemic. Ranhill SAJ served approximately 1.26 million accounts in 2022, up 2.0% y-o-y (2021: +1.6%). Its customer base is predominantly residential users (about 85% of customer accounts), with the remainder split between commercial (14%) and other users (1%). The commercial segment, which made up over 58% of Ranhill SAJ’s 2022 revenue, would continue to be a major revenue contributor. In 2022, increased commercial consumption (+6.3%) and revenue (+5.8%) had more than offset the 2.0% and 4.6% declines in the residential segment. Overall water consumption and consolidated revenue increased by 1.4% and 1.8% y-o-y to 512.2 million m3 and RM1.12 billion in 2022 (2021: 504.9 million m3 and RM1.10 billion). Outstanding accounts as a percentage of revenue remained below 10% as at end-2022, with the average collection period improving slightly to 32 days in 2022 (2019-2022: 36 days). 

Moderating the rating is that Ranhill SAJ has no independent legal ability to increase service rates without the government’s approval. Operating cost increases that outpace growth in water tariffs could pressure profitability and cash flow generation. Ranhill SAJ is also exposed to licensing risk, although we see this as low given the company’s well-established operations in water treatment and distribution, and strong performance record in meeting the key performance indicators (KPI) set by regulator, National Water Services Commission (SPAN). The licence to operate water assets is renewable every three years by SPAN, and Ranhill SAJ is currently in its fifth operating period (January 2021 – December 2023). Ranhill SAJ also operates under a 45-year Facility Agreement (from September 1, 2009) with the national water asset owner, Pengurusan Aset Air Berhad (PAAB), from whom it leases water assets. 

Ranhill SAJ has a clean balance sheet as it is prohibited from incurring borrowings unrelated to its licensed activities, while having limited capital needs as the responsibility to develop water assets and associated funding lies with PAAB. In 2022, Ranhill SAJ distributed RM70.0 million in dividends (2021: RM90.0 million), of which SAJ Capital received RM56 million for its 80% share (via Ranhill Capital). 

Ranhill SAJ’s base case projections assume dividend payments of RM159.6 million in 2023 and an annual average of RM125 million over 2024-2026 to its shareholders. This could translate into RM100 million to RM128 million of dividend income a year for SAJ Capital for its 80% share. Under this scenario, SAJ Capital’s financial service cover ratio (FSCR) is projected to be strong at an average 3.0x between 2023 to 2026, well above the covenanted 1.5x. We see covenant headroom as adequate; our breakeven analysis indicates that SAJ Capital will require a minimum annual dividend of about RM70 million from Ranhill SAJ to meet the FSCR covenant. 

The stable outlook considers the stable water demand characteristics and reflects MARC Ratings’ expectations of Ranhill SAJ’s continuing robust operating performance, allowing it to upstream dividends and provide a healthy debt service buffer to SAJ Capital. 

An upgrade in the near term is unlikely but sustained improvements to Ranhill SAJ’s operational and financial profiles could lead to a positive rating action. Greater service rate flexibility, which could enhance prospects for beating forecast expectations and bolster financial metrics, will be credit positive.  

The rating could come under pressure in the event of significant operational underperformance by Ranhill SAJ on a sustained basis, leading to reduced headroom for Ranhill SAJ to distribute dividends.  As SAJ Capital relies on dividends from Ranhill SAJ to service its sukuk, smaller-than-expected dividends from Ranhill SAJ could weigh on SAJ Capital’s credit quality.