MARC has affirmed its rating on Assar Chemicals Sdn Bhd’s (ACSB) RM150 million Serial Sukuk Musyarakah (Sukuk) at AAAIS. The outlook on the ratings is revised to negative from stable. The affirmed rating continues to be upheld by stable revenue generation of ACSB supported by the long-term agreement with high credit standing terminal users, namely Petronas Dagangan Berhad (PDB) and Shell Timur Sdn Bhd (STSB), as well as prompt collection of monthly payments from the two terminal users which form the source of ACSB’s debt servicing. The rating outlook is revised to negative to reflect MARC’s concern on the lower-than-expected residual cash reserves and liquidity position of ACSB which may challenge ACSB’s cash generation ability to meet its debt service obligation in August 2011.

ACSB is 100%-owned by Assar Senari Sdn Bhd, which is linked to the Sarawak state government through a 20% ownership by Yayasan Sarawak, and was incorporated to undertake the construction of an independent oil terminal (IOT). ACSB signed a Musyarakah contract with the Sukukholders for the purpose of constructing and leasing the IOT, which is located in Senari, Kuching. The Sukuk trustee holds a beneficial interest in the IOT on behalf of the Sukukholders. The IOT is leased to ACSB pursuant to a lease agreement between the Sukuk trustee and ACSB. Contracted monthly tariffs charged to terminal users allow for cost recovery of the project and fund the serial redemption of the Sukuk which commenced in August 2008. The terminal commenced its operations on January 2007, and serves as a centralised storage facility for bulk petroleum products and liquefied petroleum gas. ACSB’s related company IOT Management Sdn Bhd, in which PDB and STSB have direct shareholding of 20% and 10% respectively, was appointed to manage, operate and maintain the oil terminal for a period of 30 years.

ACSB’s financial performance has been relatively stable and within expectations since commencement of IOT’s commercial operation. ACSB recorded revenue of RM25.3 million in FY2009 (FY2008: RM24.9 million) derived from IOT tariff collections. Pre-tax profit remains relatively steady at RM6.8 million (FY2008: RM6.8 million). Operating profit margin is slightly lower than in preceding years attributed to 6.6% higher administrative and operating expenses, but remained high at 59.2%.  ACSB’s financial results for the first nine months of 2010 (9MFY2010) produced a pre-tax profit of RM6.1 million on the back of revenue of RM19.2 million. Operating margins remained strong at 62.4%, given the relative stability of its operations. Meanwhile, ACSB’s balance sheet continued to improve with lower debt from the scheduled redemption of the Sukuk coupled with an increase in retained earnings. The debt-to-equity ratio stood at 2.4 times as at year-end 2009 and continued to decline to 2.0 times as at September 2010, below the covenanted level of 4.0 times.

ACSB’s net cash flow generated from operations stood at RM21.5 million (FY2008: RM12.8 million) as there was minimal transfer of cash to its penultimate holding company, Assar Senari Holdings Sdn Bhd (ASHSB) and other related entities. Consequently, its finance service coverage ratio (FSCR) improved to 1.5 times compared to 1.3 times in FY2008. Nonetheless, MARC cautions that any future significant transfer of cash predisposes ACSB to higher liquidity risk and in turn reduces its headroom with respect to its FSCR covenant of 1.2 times.

Although ACSB’s overall financial metrics in the current financial year under review improved year-on-year, MARC notes that ACSB faces challenges in meeting the principal and secondary Sukuk obligations amounting to RM23.4 million in August 2011. Adding the balances in designated accounts as at October 31, 2010 totaling RM10.6 million and assuming that the IOT operations generate monthly free cash flow of RM1.4 million, ACSB would have approximately RM19.8 million available by July 2011 after paying the profit payment of RM3.4 million in February 2011. The Sukuk covenant requires ACSB to immediately top up any shortfall amount one month prior to the payment date, which MARC believes would have to come from its parent company’s outstanding amount due to ACSB totaling RM21.9 million.

ACSB’s rating faces downward pressure if its liquidity position does not show improvement in the next six to seven months. Furthermore, the ongoing restructuring exercise in Assar Senari group of companies which, among others, resulted in the high turnover of ACSB’s management staff has heightened MARC’s concern in light of potential changes in the strategic direction and operational aspects of ACSB.

Contacts:
David Lee, +603-2082 2255/ david@marc.com.my;
Khairul Emran Mahmud, +603-2082 2278/ emran@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.