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-June 2024 is RM420 million.

SAJ Capital is a wholly-owned funding vehicle of Ranhill Capital Sdn Bhd, which owns 80% of 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 agency notes the recent change in shareholding at the ultimate parent Ranhill Utilities Berhad (Ranhill Utilities), which owns 100% of Ranhill Capital, and views that it would not have a material impact on the overall credit of Ranhill SAJ.  

The rating is premised on Ranhill SAJ’s solid business position as the exclusive provider of treated water in Johor, and its strong operating track record. These qualities support a stable cash flow profile of about RM563 million in earnings before interest, tax, depreciation and amortisation (EBITDA), mid-40% EBITDA margins and around RM430 million in cash flow from operations (CFO) a year (average over the past five years). There is margin and cash flow upside given recent tariff increases. The service area remains strong with steady population growth (to an estimated 4.2 million people in 1Q2024) and increasing industrial activities, which should continue to support favourable demand for treated water. Water consumption grew by 3.7% to 531.1 million cubic metres (m3) in 2023, slightly faster than the average 2.5% annual growth seen over the past 10 years. This, together with the upward adjustments in water tariffs for the commercial category in 2023, drove Ranhill SAJ’s revenue up by 10.4% to RM1.27 billion in the year, from RM1.15 billion in 2022. Effective February 2024, the water tariffs for domestic users in Johor have also been increased by between 15 sen/m3 to 35 sen/m3. The rates for non-domestic users have also risen further by 5 sen/m3; this came after rate hikes of between 6.1% to 10.7% (depending on usage) in 2023. Assuming no change in consumption levels, the rating agency estimates Ranhill SAJ’s revenue would increase to close to RM1.4 billion in 2024 (+10% y-o-y), driven by the rate hikes.  

Since rates are governed by the government through Suruhanjaya Perkhidmatan Air Negara (SPAN), any operating cost increases that outpace growth in water tariffs could put pressure on profitability and cash flow generation. However, tariffs are reviewed every three years for adjustments, although this is subject to regulatory approval. As regards licensing risk, MARC Ratings continues to view the risk as low given Ranhill SAJ’s well-established operations in water treatment and distribution, and its strong performance record in meeting the key performance indicators (KPI) set by SPAN. The license to operate water assets is renewable every three years by SPAN, and Ranhill SAJ is currently in its sixth operating period (January 2024 – December 2026). 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 secure associated funding lies with PAAB. In 2023, SAJ Capital (via Ranhill Capital) received approximately RM76.0 million in dividends from Ranhill SAJ for its 80% share; total dividends paid in 2023 was RM95.0 million versus RM75.0 million in 2022.

Ranhill SAJ’s base case projections assume dividend payments of RM100.0 million to RM140.0 million p.a. to its shareholders over 2024-2028, or RM80.0 million to RM112.0 million to SAJ Capital for its 80% share. Under this scenario, SAJ Capital’s financial service cover ratio (FSCR) is projected to remain strong at an average of 2.3x for the five-year outlook period through 2028, above the covenanted 1.5x. MARC Ratings views covenant headroom as adequate; break-even analysis indicates that SAJ Capital will require a minimum annual dividend of about RM75.0 million from Ranhill SAJ to meet the FSCR covenant.

The stable outlook incorporates the steady water demand characteristics and reflects MARC Ratings’ expectations of Ranhill SAJ’s continuing robust operating performance enabling 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, lower-than-expected dividends from Ranhill SAJ could weigh on SAJ Capital’s credit quality.