MARC has affirmed its rating on SAJ Holdings Sdn Bhd’s (SAJH) RM1.28 billion Bai Bithaman Ajil Islamic Debt Securities (BaIDS) at AA-ID. Concurrently, MARC has revised the rating outlook to developing from stable to reflect uncertainties with regards to the current industry restructuring which involves the take over of water assets by the federal government through Pengurusan Aset Air Berhad (PAAB) and the migration of concessions to a new licensing regime under the purview of National Water Services Commission (SPAN). The affirmed rating continues to reflect SAJH’s dominant position as the sole distributor of treated water in the state of Johor, robust demand for water, low operating risk and improved operating efficiency as well as the BaIDS’ protective issue structure and covenants. The rating is, however, moderated by the heavy ongoing capital expenditure in capacity enhancement.

SAJH, a subsidiary of utility conglomerate group Ranhill Berhad, is the sole concessionaire for the state of Johor’s integrated water supply operations under a 30-year concession (until 2030). Subsequent to the implementation of certain water industry restructuring initiatives by the Johor state government in 2005, SAJH has been purchasing treated water from state-owned entity, Johor Special Water Sdn Bhd (JSW). The new scheduled payment was capped at RM1.105 billion until May 2014. The concession’s tariff structure allows full cost recovery and an internal rate of return (IRR) of between 14% and 18% to be achieved on the project. In the event the gazetted tariff is lower than the applicable Agreed Tariff or if implementation has been delayed, the Johor state government is obliged to compensate SAJH. The favourable tariff structure underpins SAJH’s robust profitability and strong cash flow generation ability.

SAJH continues to exhibit improved operating efficiency. As of September 2008, the average collection period has improved to 41.70 days from 42.81 days in December 2007. Meanwhile, its Non Revenue Water (NRW) level improved to 30.9%, down from 37.4% in January 2004. Nevertheless, MARC views that to bring its NRW level to its target of 20% by 2010 as provided under the concession agreement will be extremely challenging for SAJH. .
 
During the financial year ended June 30, 2008 (FY2008), SAJH’s revenue increased by 5.4% driven by the full impact of an average 2.4% tariff hike implemented in January 2007 and increased water consumption. Profitability remains stable with low volatility of direct costs while cash flow position remains strong with free cash flow of RM207.3 million and high cash balances of RM606.61 million as at end FY2008. SAJH continue to possess considerable headroom with regards to its compliance with facility covenants. Its Debt-to-Equity (DE) ratio of 1.02 times (x) was well below its gearing cap of 2.33x while its Financial Service Coverage Ratio (FSCR) of 6.41x compared favourably to a minimum covenanted FSCR of 2.25x. As of September 2008, the balances in the various designated accounts of SAJH stood at RM642.45 million with Finance Service Reserve Account (FSRA) of RM152.51 million more than sufficient to cover the first of 10 annual principal repayments on the BaIDS due in October 2010.

Contacts:
Rustam Apandi Jamaludin 03-2090 2250/ rustam@marc.com.my;
Khairul Emran Mahmud 03-2090 2278 / emran@marc.com.my