MALAKOFF POWER BERHAD - 2023 |
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| Report ID | 60538900469672 | Popularity | 181 views 65 downloads | |||||
| Report Date | Dec 2023 | Product | ||||||
| Company / Issuer | Malakoff Power Bhd | Sector | Infrastructure & Utilities - Power | |||||
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| Rationale |
Rating action MARC Ratings has assigned preliminary ratings of MARC-1IS/AA-IS to Malakoff Power Berhad’s (MPower) proposed Islamic Commercial Papers/Islamic Medium-Term Notes (ICP/IMTN) programmes of up to RM1.2 billion. The outlook on the IMTN programme is stable. Concurrently, the rating agency has also affirmed its AA-IS rating on MPower’s outstanding RM2.09 billion Sukuk Murabahah with a stable outlook. Rationale MPower, a wholly-owned subsidiary of Malakoff Corporation Berhad (Malakoff), is the operations and maintenance (O&M) operator of independent power producers (IPP) held through companies that are majority-owned by its parent. Given the operational linkages between Malakoff and MPower as well as their reliance on residual cash flows from the IPP companies, the rating approach is premised on their consolidated credit profile. The Kafalah guarantee provided by Malakoff on the existing Sukuk Murabahah programme in favour of MPower’s sukukholders underscores the rating approach; a similar guarantee will be extended to the ICP/IMTN programmes as well. The ratings are underpinned by sufficient and predictable cash flows from Malakoff’s IPP companies and waste management subsidiary Alam Flora Sdn Bhd to service MPower’s obligations. The IPP companies have long-term power purchase agreements (PPA) with Tenaga Nasional Berhad (TNB) (AAA/Stable), while Alam Flora has a long-term concession agreement with the Government of Malaysia for waste collection and public cleansing in Pahang, Putrajaya and Kuala Lumpur. The ratings also consider the group’s current expansion into renewable energy projects that will partly mitigate the expiring PPAs of existing power plants; in the next four years, two PPAs of power plants with total capacity of 1,653MW will expire. Moderating the ratings are risks associated with plant performance as well as execution risks in relation to the development and construction of the latest renewable projects, considering the group’s limited track record in them at this juncture. The proceeds from the proposed first issuance of RM493.0 million under the ICP/MTN programme will be mainly utilised to finance two new renewable energy projects, namely RP Hydro (84.0MW), and WTE Sg Udang (22.1MW). The projects are expected to be completed in 2Q2026 and 2Q2027. RP Hydro has a 21-year PPA with TNB, while WTE Sg. Udang has a 30-year PPA with TNB for electricity sale as well as a similar length concession with government agency Solid Waste and Public Cleansing Management Corporation (SWCorp) for gate fee payments based on waste received. Malakoff also plans to utilise approximately RM132.0 million from this issuance to potentially acquire a 49% stake in environmental solutions company E-Idaman Sdn Bhd that has long-term concession agreements with the Government of Malaysia for waste collection and public cleansing in Kedah and Perlis. MARC Ratings views that operational cash flows from existing assets would be more than sufficient to meet sukuk obligations, including profit payments for the ICP/IMTN programmes, during the construction phase of the new renewable energy projects. Furthermore, the favourable repayment profile of the ICP/IMTN programmes, with first principal repayment only due in 2029, provides a comfortable buffer period for Malakoff to rectify any teething issues arising from the projects during both pre- and post-construction phases. Execution risk associated with the RP Hydro project is partly mitigated by engagement with an experienced technical advisor. In 9M2023, Malakoff group revenue stood 7.8% lower y-o-y at RM6.8 billion mainly due to lower energy payments as coal prices were lower compared to previous year’s corresponding period. The decline in coal prices also gave rise to a net negative fuel margin stemming from the differences between coal inventory cost and the applicable coal prices used in the calculation of energy payments received from single buyer TNB. This contributed to the pre-tax loss of RM645.1 million during the period. Notwithstanding this, the rating agency notes that third quarter pre-tax losses have narrowed substantially to RM107.0 million compared to the previous quarter (pre-tax loss of RM453.7 million) as coal prices have stabilised. Future revenue and earnings would be supported by contributions from the aforementioned new renewable energy projects in its generation segment, offsetting the loss of income streams from retiring thermal IPPs in 2024 and 2027. Cash flow from operations (CFO) stood higher at RM1.0 billion on the back of higher PPA payment receipts during the period. Group capex stood at RM135.7 million mainly for maintenance works at TBP. Over the next few years, Malakoff has planned capex of between RM2.7 billion to RM3.0 billion, mainly to fund new renewable energy and sustainable projects, as well as replace Alam Flora’s ageing concession vehicles. These will be funded through a mix of internal cash generation and borrowings (mainly on an 80:20 debt-to-equity basis for projects), including the proposed ICP/IMTN programmes. The group’s liquidity position remains healthy with cash balances standing at RM2.9 billion as at end-September 2023, more than sufficient to cover near-term financial obligations of RM1.1 billion. Following completion of the acquisition of RP Hydro and its outstanding project financing of RM955.2 million, group borrowings increased to RM9.2 billion as at end-September 2023 (end-2022: RM8.7 billion). The rating agency expects the borrowings level to gradually come down as repayments on outstanding borrowings exceed additional borrowings taken on to fund capex. Additional borrowings of RM2.3 billion to fund Malakoff’s renewable projects as well as Alam Flora’s capex requirements are expected to be staggered over the next four years. Comparatively, the group is scheduled to repay an average of RM740.0 million per annum in borrowings over the next five years. As an O&M operator, MPower’s revenue is derived from fixed and variable (dispatch-based) O&M fees from the group’s thermal IPPs. In 1H2023, revenue stood 14.9% lower y-o-y due to the decommissioning of its GB3 plant, as well as lower overall dispatch at Malakoff’s plants. The company also recorded pre-tax loss of RM13.5 million due to high operating expenses incurred for overhaul and maintenance work. MARC Ratings notes that this has already been incorporated in the projections, with repayments on MPower’s sukuk mainly derived from dividends and redemptions on its existing redeemable preference shares (RPS) holdings, as well as residual cash flows from the group’s IPPs. Combined cash balances at MPower and holding company Malakoff remain sufficient at RM471.3 million as at end-November 2023. Rating outlook The stable outlook incorporates MARC Ratings’ expectation that Malakoff’s key subsidiaries will continue delivering satisfactory operational performance and upstream dividends as projected to MPower. Rating trajectory Upside scenario A rating upgrade could be considered in the event of significant improvement in the group’s cash flow coverage and leverage position. Downward scenario The rating could be lowered if the performance of Malakoff’s subsidiaries deteriorates to the extent that the group’s liquidity position and ability to meet the sukuk obligations are materially affected. Key strengths
Key risks
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