MARC has affirmed its ratings on Puncak Niaga (M) Sdn Bhd’s (PNSB) RM1.02 billion Bai Bithaman Ajil Islamic Debt Securities (BaIDS) at AAID as well as RM546.875 million Junior Notes A (A Notes) and RM435.0 million Nominal Value Redeemable Unsecured Bonds (RUB) at A+ respectively. The affirmed ratings reflect low demand risk for bulk water, solid historical debt service coverages and adequate water supply, moderated by dependence on long term offtake from single offtaker, Syarikat Bekalan Air Selangor Sdn Bhd (Syabas). The two-notch higher rating of BaIDS acknowledges the legal priority of the secured debt over the other rated obligations of PNSB and incorporate the fully funded 12-month debt service reserve account for the BaIDS. The RUBs are rated the same as the A Notes, indicating their similar covenant packages and pari passu ranking with all other present and future unsecured obligations. The developing outlook on the ratings has been maintained on account of the continuing uncertainty in PNSB’s regulatory and operating environment with the Selangor state government’s (SSG) water sector consolidation  plan reaching  a stalemate  as a result of PNSB and Syabas rejection of the SSG’s offers.

PNSB is a wholly-owned subsidiary of Bursa-listed Puncak Niaga Holdings Berhad (PNHB). PNSB holds concessions for the operations and maintenance of 29 water treatment plants (WTP) in the Klang Valley. In addition, PNSB also undertakes turnkey water projects.

Medium and long-term water demand fundamentals in the state of Selangor, and Federal Territories of Kuala Lumpur and Putrajaya are favourable with area population and water demand continuing to grow. PNSB’s cash flow certainty is afforded by the take-or-pay provision and bulk supply rate (BSR) structure under its concession agreements. PNSB’s water concession provide for a minimum offtake volume while tariffs are adjusted annually to allow for a pass-through of additional production cost.
 
During the year, PNSB’s sole-offtaker, Syabas, has been delaying its payment to all WTP operators consequent to a deferment of a scheduled increase in its water tariff in January 2009. MARC was made to understand that Syabas has only been paying about RM32 million each month, or equivalent to about 60% of PNSB’s monthly billings. Mitigating the increased collection risk somewhat is an interest-free loan which the Federal government has extended to Syabas to partially defray past due amounts to WTP operators. MARC understands that PNSB has received payment for a portion of its past due receivables from Syabas.

For financial year ended December 31, 2008 (FY2008), PNSB’s revenue declined by 24.4% to RM657 million, attributed to lower revenue from its turnkey water project segment in the absence of significant new projects and completion of existing ones. However, water revenue, the main revenue contributor, remains stable, having increased by 6.1% due to increased water demand as well as higher BSR for the Sungai Selangor Water Supply Scheme Phase 2 (SSP2) and the 25 WTPs scheme. In line with lower revenue, PNSB’s profit before tax declined to RM90.5 million (FY2007: 96.3 million). However, PNSB’s operating profit margin increased to 39.7% (FY2007: 31.2%), attributed to relatively higher profit margin from sale of treated water compared to the water projects segment in FY2008. Cash flow from operation of RM427 million is sufficient to cover current capital expenditure and debt obligations. PNSB’s annual debt service coverage (ADSCR) of 7.13 times (x) and debt-to-equity (DE) ratio of 1.38x has ample headroom against the covenanted ADSCR of 1.25x and DE ratio of 4.00x. While no major capital expenditure will be made going forward, PNSB needs to make available a major portion of its cash flow for debt repayment servicing.

The put options attached to the BaIDS allow BaIDSholders to sell BaIDS on certain series dates to PNSB. There is a possibility that PNSB would have to meet a RM150.0 million BaIDS redemption in October 2010 should holders of the RM150 million Series 5 BaIDS opt to exercise their put option. Excluding funds in the debt service reserve account (DSRA), which is pre-funded to meet PNSB’s debt service obligations for one year, PNSB still has RM347.14 million cash balance as at end-June 2009, which will be sufficient to cover another year’s debt service requirement in addition to a potential RM150 million redemption in October 2010.

The developing outlook also acknowledges the possibility of an early redemption of PNSB’s rated facilities  upon successful resolution of the asset pricing issue.

Contacts:
Sandeep Bhattacharya 03-2090 2247/ sandeep@marc.com.my;
Khairul Emran Mahmud 03-2090 2278/ emran@marc.com.my;
Sharidan Salleh 03-2090 2243/ sharidan@marc.com.my