MARC Ratings has affirmed its AA-_IS  rating on Malakoff Power Berhad’s (MPower) outstanding RM2.43 billion Sukuk Murabahah. The rating outlook is stable. 

Wholly owned by Malakoff Corporation Berhad (Malakoff), MPower is the operations and maintenance (O&M) operator of independent power producers (IPPs) which are held through companies that are majority-owned by its parent. Given operational linkages between Malakoff and MPower as well as the reliance on residual cash flows from the IPP companies by both, the rating approach has continued to be premised on their consolidated credit profile. The Kafalah guarantee provided by Malakoff in favour of MPower’s sukukholders underscores the rating approach.  

The affirmed rating is 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. The rating also considers its fairly balanced IPP portfolio consisting of two coal-fired and three gas-fired plants, namely Tanjung bin Power (TBP), Tanjung bin Energy (TBE), Segari Energy Ventures (SEV), GB3, and Prai Power (PPSB). The plants have a combined capacity of 5,393MW. Moderating the rating are risks associated with plant performance.

In 1H2022, Malakoff recorded stronger revenue of RM4.2 billion due to higher energy payments (EP) of RM2.7 billion from its coal plants (1H2021: RM2.9 billion; RM1.4 billion), following an uptrend in coal prices during the year. This offset lower capacity payments (CP) of RM856.1 million (1H2021: RM975.2 million) caused by outages at TBE’s power plant. The outages stemmed from a damaged turbine blade that occurred in early November 2021 and was rectified in mid-February 2022.  While TBE represents Malakoff’s third-largest asset in its IPP portfolio in terms of generating size, the IPP is not projected to contribute any cash flows towards the sukuk repayments.

While cash flow from operations was lower at RM44.6 million, mainly due to higher payments to fuel suppliers amid higher fuel costs, this is expected to improve during the remainder of the year as PPA payments from TNB are received. The group’s debt-to-equity ratio stood lower at 1.44x as at end-June 2022 (end-2021: 1.51x) following the scheduled repayment of outstanding borrowings. We expect its leverage position to continue improving as repayments on outstanding borrowings are projected to exceed additional borrowings taken on to fund its capital commitments; the group is scheduled to repay RM1.1 billion in outstanding borrowings over the next one year compared to additional borrowings of RM710.0 million over the next four years to fund Alam Flora’s expansions and asset replacement.

As an O&M operator, MPower’s revenue generation depends on the utilisation level of the power plants. MPower’s revenue in 1H2022 increased by 5.8% y-o-y due to higher variable O&M payments as a result of higher dispatch demand at Malakoff’s plants. The company also recorded pre-tax profit of RM16.2 million, after losses in 2020 and 2021 due to high operating expenses incurred for major plant maintenance work. MPower expects stronger earnings in 2022 and 2023, as fewer maintenance days have been scheduled at Malakoff’s IPPs. Cash and bank balances (including investments) stood at RM212.3 million as at end-June 2022, and will be built up through loan repayments from Malakoff as well as redeemable preference shares (RPS) dividends and redemptions in order to meet its upcoming sukuk repayment of RM340.0 million in December 2022. 

The stable outlook incorporates MARC Ratings’ expectation that Malakoff’s key subsidiaries will continue delivering satisfactory operational performance.

A rating upgrade could be considered in the event of significant improvement in the group’s cash flow coverage and leverage position.

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.