MARC has reaffirmed the ratings of Sacofa Sdn Bhd’s (SACOFA) and its special purpose subsidiary, Sarawak Gateway Sdn Bhd’s (Sarawak Gateway) RM160.0 million Sukuk Istisna’ and RM240.0 million Sukuk Ijarah at AAAIS. The negative outlook on the ratings has been maintained. The affirmed ratings reflect SACOFA’s exclusive rights in developing, owning and managing telecommunication towers and structures (towers) in the State of Sarawak; its status as a government-related entity of State Government of Sarawak (SGS) which has an implied rating of AAA and; the credit quality of rental payment stream from creditworthy telecommunication companies (telcos). The negative outlook reflects its current high debt leverage position at 6.1 times (as at end December 2007), and the likelihood that capital commitment from the SGS will be required to comply with the covenanted gearing cap of 4.0 times by November 2008.

Based on SACOFA’s unaudited profit after tax for FY2007 at RM18.0 million, the company’s profitability for FY2008 would have to be at least double that of FY2007 in order to comply with its covenanted debt to equity gearing ratio. SACOFA targets to construct 128 new telco towers in 2008 as compared to 76 towers and 119 towers in 2007 and 2006, respectively. However, MARC notes that as at end December 2007, 53% of the 128 towers budgeted for FY2008 are at either pending acceptance from the telcos or undergoing construction, whilst the remaining towers are at the planning stage. Nevertheless, there may be a moderate risk of slippage in the handover of towers to the telcos due to the delay of power supply to the new towers. MARC takes comfort in the State Financial Secretary of Sarawak’s (SFS) close monitoring of SACOFA’s financial performance. MARC understands that SACOFA’s Board of Directors and SFS are aware of a potential need for capital injection.

SACOFA was formed under the SGS’s initiative with the purpose of providing the telecommunication infrastructure and monitoring the growth of telecommunication facilities in the State of Sarawak. SACOFA was granted a 20-year concession in 2002 which entitles it the exclusive right to erect and maintain telecommunication towers under a build and operate concept, and to lease, rent or grant licenses over such towers. The license agreement between SACOFA and the telcos offer key support to the Sukuk. SACOFA had entered into a Master License Agreement for Time Two A (T2A) programme with Celcom (Malaysia) Bhd, Maxis Broadband Sdn Bhd and Digi Telecommunications Sdn Bhd in June 2005 covering a period ranging from seven to ten years. Individual license agreements have also been signed with individual telcos for programmes outside T2A covering a period ranging from five to ten years. Moving forward, SACOFA will be entering a Master License Agreement with the telcos for sites under the non T2A programme for a period ranging from seven to ten years. Under the license agreements, monthly rental payments are payable in accordance with an agreed license fee schedule by the telcos, which will use the towers on a sharing basis. Rental payments are dependent on the height of the towers, number of telcos/users sharing the towers and the locality of the towers.

Rental payments from the telcos are expected to contribute approximately 60% to total revenue during the tenure of the Sukuk Istisna’ and Sukuk Ijarah while the remaining 40% will be contributed by the submarine cable and onland fibre optic network business segment. For the 12-month period ended 31 December 2007, the unaudited revenue doubled to RM80.5 million as compared to RM41.4 million during the previous corresponding period arising from the higher number of towers being in operation, i.e. 330 towers. Apart from revenue improvements, cost control also contributed to overall better profitability. The unaudited profit before tax was RM18.2 million in FY2007 in comparison to a loss before tax of RM28.3 million for FY2006. Results for FY2007 reflected the shortfall against budget with negative variation of 17.9% and 40.3% for revenue and profit after tax respectively. This is primarily due to delays in site approval and power supply connectivity in first half 2007 which SACOFA has addressed by seeking special assistance from the relevant State Authority and obtaining approval from Sarawak Electricity Supply Corporation Sdn Bhd (SESCO) to take the role of the mechanical and electrical turnkey contractor to expedite electrical power connection to the tower sites.

Payments due from the lease of telecommunication towers and bandwidth from its fibre optic network constitute the repayment source for the redemption of the primary and secondary notes.  Similarly, all Ijarah rentals due from SACOFA under Sarawak Gateway’s Sukuk Ijarah have been earmarked for redemption of principal and profit payments.  The payment for the primary and secondary notes of the Sukuk Istisna’ and Sukuk Ijarah rank pari passu. Based on the balance in the telco revenue account of RM38.6 million (as at 31 December 2007); the current rental stream as well as the projected rental revenue from the towers from creditworthy telcos; and income from the lease line providers, SACOFA is expected to more than comfortably meet its first scheduled redemption of RM60.0 million in November 2009.

The outlook may be revised from negative to stable should SACOFA comply with the covenanted debt to equity of 4.0 times as well as meet its budgeted profit numbers for FY2008.