CREDIT ANALYSIS REPORT

TANJUNG BIN O&M BERHAD - 2019

Report ID 6067 Popularity 255 views 13 downloads 
Report Date Dec 2019 Product  
Company / Issuer Tanjung Bin O&M Bhd Sector Infrastructure & Utilities - Power
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its AA-IS rating on Tanjung Bin O&M Berhad’s RM470.0 million Islamic Securities (Sukuk Wakalah) with a stable outlook.

The rating reflects the credit strength of the issuer’s parent, Malakoff Power Berhad (MPower), which has provided an unconditional and irrevocable undertaking in the form of cash deficiency support to top up any shortfall in the finance service reserve account (FSRA) for the Sukuk Wakalah. MARC has applied a full credit substitution approach on Tanjung Bin O&M’s credit risk assessment with MPower’s senior credit rating of AA-/Stable serving as the rating floor.

The rating is supported by the fairly predictable cash flow that Tanjung Bin O&M generates as the operations and maintenance services (O&M) provider of the 2,100MW power plant owned by sister company Tanjung Bin Power Sdn Bhd (TBP), a subsidiary of Malakoff Corporation Berhad (Malakoff), the parent of MPower. The rating also incorporates the partial transfer of operational risks to MPower via a sub-operations and maintenance agreement (sub-OMA). The OMA and sub-OMA are coterminous with the 25-year power purchase agreement between TBP and Tenaga Nasional Berhad.

Tanjung Bin O&M’s revenue mainly consists of fixed operating fees and variable operating fees, which are based on the TBP plant’s net electricity output. In 2018, revenue declined by a marginal 0.2% to RM339.5 million, due to lower electricity dispatch of 15,566 GWh (2017: 15,856 GWh). However, pre-tax profit declined to RM41.9 million (2017:RM51.0 million) on higher finance costs, which are expected to remain high given that interest on amounts due to the holding company and immediate holding company would be accounted for from 2018 onwards. Revenue is expected to grow in 2019 with the increase in fixed and variable income by 4.0% each as per the OMA, which would moderate the impact from higher planned outages for scheduled maintenance in the year.

Cash flow from operations (CFO) stood lower at RM43.4 million mainly due to payment of payables for the scheduled maintenance outages. The company does not have any sukuk repayment in 2018 and built-up its liquidity position to meet future obligations. The sukuk outstanding was RM290.0 million as at end-September 2019. Cash balance stood higher at RM174.0 million. Based on cash flow projections, Tanjung Bin O&M’s CFO can cover sukuk obligations except for 2021, during which the first of three major overhauls scheduled over the remaining sukuk tenure will occur. In this regard, Tanjung Bin O&M would need to rely on retained cash in 2021 as its total financial obligations of RM70.3 million under the Sukuk Wakalah will coincide with a major overhaul which is budgeted to cost RM50.0 million.

Its parent MPower undertakes the O&M of Malakoff’s majority-owned domestic power generation facilities and receives dividend income from redeemable preference shares (RPS) in the group’s subsidiaries/independent power producers including TBP. MPower’s cash generation capacity mainly relies on the utilisation level of the TBP power plant and residual earnings of dividend and principal redemption of RPS.

The stable outlook incorporates MARC’s expectation that the TBP power plant will sustain its performance and MPower will maintain its credit profile to support its ability to meet its financial obligations. Any material changes in the credit quality of MPower or TBP would lead to downward rating pressure given the substantial operational and financial linkages between the entities.

Major Rating Factors

Strengths

  • Predictable cash flows from O&M contract with Tanjung Bin Power Sdn Bhd (TBP);
  • Cash deficiency support from parent Malakoff Power Berhad (MPower); and
  • Operational risks mostly transferred to MPower via a subcontract O&M.

Challenges/Risks

  • Highly dependent upon operational performance of the TBP power plant; and
  • Sensitivity of variable operating revenue due to demand risk.
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