CREDIT ANALYSIS REPORT

SAJ CAPITAL SDN BHD - 2021

Report ID 605389049 Popularity 57 views 9 downloads 
Report Date Sep 2021 Product  
Company / Issuer SAJ Capital Sdn Bhd Sector Infrastructure & Utilities - Water
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has affirmed its AA-IS rating on SAJ Capital Sdn Bhd’s (SAJ Capital) Sukuk Murabahah of up to RM650.0 million with a stable outlook. Total outstanding under the sukuk as at end-June 2021 is RM570 million.

Rationale     
SAJ Capital is 100%-owned by Ranhill Capital Sdn Bhd. The latter holds an 80% interest in Ranhill SAJ Sdn Bhd, the exclusive provider of source to tap water in Johor. SAJ Capital is a single-purpose funding conduit for the sukuk issuance. The source for profit and principal repayments as regards the sukuk will be from dividends from Ranhill SAJ. The rating on the sukuk, therefore, reflects the credit strength of Ranhill SAJ. 

The rating is mainly driven by Ranhill SAJ’s strong business position which takes into consideration its monopolistic service line to provide treated water within Johor where stable demographic trends with modest annual growth has been evident. Water usage has largely been rising at an average 3% per annum over the past five years, supported by steady population growth and higher industrial activities in Johor. Approximately 85% of Ranhill SAJ’s customer base of 1.22 million accounts consists of residential units, lending some stability to water usage in 2020. The outbreak of COVID-19 has not had a material impact on Ranhill SAJ’s performance, with the overall volume and revenue declining just 1.6% and 5.2% in 2020. Outstanding accounts as a percentage of total operating revenue also remain less than 10%, with the average collection period (36 days) remaining comparatively consistent with levels seen over the last several years.

Moderating the rating is the fact that Ranhill SAJ has no independent 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). License to operate water assets is renewable every three years by SPAN. Ranhill SAJ is currently in its fifth operating period (January 2021 – December 2023). It also operates under a 45-year Facility Agreement with the national water asset owner, Pengurusan Aset Air Berhad (PAAB), from whom it leases water assets. 

Ranhill SAJ has a lean 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 2020, Ranhill SAJ distributed some RM170.0 million in dividends, of which SAJ Capital received approximately RM136 million for its 80% share (via Ranhill Capital).

Under the base case projections that assume dividend payments of RM110 million a year to shareholders, or RM88 million p.a. to SAJ Capital, the issuer’s finance service cover ratio (FSCR) is projected to be strong at an average 2.5x for the three-year outlook period to 2023, well above the covenanted 1.5x. Under MARC’s sensitised case, a more moderate water revenue growth of 3% annually (average growth rate for 2013–2020) could reduce Ranhill SAJ’s ability to pay dividends as budgeted particularly in 2023. We note, however, that Ranhill SAJ could discuss with PAAB to scale down capex in line with demand (thus lower the operating lease burden on Ranhill SAJ). Ranhill SAJ also has some flexibility to cut back operating expenditure if needed as it did in 2020.

Under MARC’s breakeven analysis, the lowest constant level of annual dividend reduction that SAJ Capital can tolerate over 2021–2023 for it to be able to meet its financial obligations and keep a minimum FSCR of 1.5x is around 37.5% (from base case).

Rating outlook    
The stable outlook reflects MARC’s view that water utility has broadly stable demand characteristics given the essentiality of service, thus our expectation that Ranhill SAJ’s operating performance will remain robust to enable it to upstream dividends and provide a healthy debt service buffer to SAJ Capital.

Rating trajectory

Upside scenario     
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 rate flexibility, which could enhance prospects for beating forecast expectations and fortify financial metrics, will be credit positive.

Downside scenario     
The rating could come under downward 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 stream from Ranhill SAJ could weigh on SAJ Capital’s credit quality. 

Key strengths
Sole water treatment operator and treated water distributor in Johor
Strong operating track record
Stable cash flow generation

Key risks
No independent ability to increase service rates 
Licensing risk


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