Rating action        

MARC Ratings has affirmed its AA-_IS rating on Tanjung Bin O&M Berhad’s outstanding RM180.0 million Sukuk Wakalah with a stable outlook.

The rating affirmation reflects the credit strength of Tanjung Bin O&M’s parent, Malakoff Power Berhad (MPower)(AA-_IS/Stable), which has provided an unconditional and irrevocable undertaking to top up any shortfall in the finance service reserve account (FSRA) for the Sukuk Wakalah. On this basis, as well as the operational and financial linkages between the issuer and its parent, MARC Ratings has applied a full credit substitution approach to Tanjung Bin O&M’s credit risk assessment with MPower’s senior credit of AA-/Stable. Wholly-owned by Malakoff Corporation Berhad (Malakoff), MPower undertakes the operations and maintenance (O&M) for its parent’s majority-owned domestic independent power producers (IPP).

Tanjung Bin O&M provides O&M services for a 2,100MW power plant owned by its sister company, Tanjung Bin Power Sdn Bhd (TBP) under an O&M agreement (OMA). It had partially transferred the operations to MPower under a subcontract of the OMA (sub-OMA); both the OMA and sub-OMA are coterminous with the 25-year power purchase agreement (PPA) between TBP and Tenaga Nasional Berhad (TNB).

Tanjung Bin O&M mainly derives its revenue from fixed and variable operating fees; the latter is based on the TBP plant’s net electricity output. In 1H2022, revenue was lower by 5.0% y-o-y to RM151.2 million following a 7.4% y-o-y decline in electricity output due to higher planned outage for major maintenance works of 98 days (1H2021: 68 days). Coupled with higher operating cost for the plant’s maintenance works, Tanjung Bin O&M registered pre-tax loss of RM64.8 million (1H2021: pre-tax loss of RM30.6 million). The company expects the loss to be lower for full year 2022 as no major maintenance is scheduled. Tanjung Bin O&M expects to undertake major maintenance and inspection works in 2023 and 2024 with higher planned outages of more than 100 days each year.

Cash flow from operations (CFO) in 1H2022 turned negative following significant cost paid for major maintenance during the period. Given major maintenance planned between 2023 and 2024, CFO will be pressured with high working capital requirements. Mitigating this is Tanjung Bin O&M’s liquidity position which has been built up in the last three years to meet the expected higher operating costs for the major maintenance; designated account balances stood at RM114.7 million as at end-September 2022. In addition, a lower sukuk repayment of RM15.0 million in July 2023 and no repayment scheduled for 2024 and 2025 will ease its financial burden. 

In terms of MPower’s performance, revenue generation depends on the utilisation level of the power plants that are majority-owned by Malakoff, for which it undertakes the O&M. MPower also receives dividend and principal redemption from its holding of redeemable preference shares (RPS) issued by some of these 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 managed to record pre-tax profit of RM16.2 million during 1H2022, after losses in 2020 and 2021 due to high operating expenses incurred for major maintenance works. MPower expects stronger earnings in 2022 and 2023, as fewer maintenance days and costs have been planned at Malakoff’s IPPs. 

The stable outlook incorporates our expectation that TBP will perform within expectation and Tanjung Bin O&M’s liquidity will be sufficient to meet any cash flow shortfalls in periods when TBP has major maintenance works, and that MPower will maintain its credit profile to support its ability to meet Tanjung Bin O&M’s financial obligations.

A rating upgrade would be considered in the event of an improvement in the credit profile of MPower.

Downward pressure on the rating could occur if there is any material decline in the credit profile of MPower or TBP.