MARC has affirmed its A rating on Aliran Ihsan Resources Berhad’s (AIRB) RM28.5 million outstanding Redeemable Convertible Unsecured Loan Stocks (RCULS) with a stable outlook. The rating continues to reflect the strength and stability of the income stream of wholly-owned subsidiary Southern Water Corporation Bhd (SWC) and 49% associate company Equiventures Sdn Bhd (ESB), as well as AIRB’s historically low gearing level. AIRB’s Sinking Fund Account (SFA) is fully funded as of October 31, 2010, ahead of its final November 2011 RCULS redemption of RM28.5 million.

AIRB is a Bursa-listed holding company with 69.8% of its shares held by conglomerate MMC Corporation Berhad as at December 2, 2010. Apart from SWC and ESB, AIRB also holds significant interests in water treatment plant operator Strategi Tegas (M) Sdn Bhd (STSB) (30%). AIRB’s other wholly-owned subsidiary is Southern Water Engineering Sdn Bhd, a water treatment contractor.

MARC believes that AIRB’s fully funded SFA will insulate loan stock holders from near-term credit risks arising from the restructuring of the water industry. Furthermore, the Suruhanjaya Perkhidmatan Air Negara (SPAN) has authorised SWC and ESB to continue operating under their respective concessions until the end of their concession periods (SWC until June 2014 and ESB until June 2012), ensuring near-term business continuity for both water treatment concessionaires.

The affirmed rating also incorporates improved revenue collection at SWC and ESB with Pengurusan Aset Air Berhad (PAAB) assuming the responsibility for making fixed monthly payments from former offtaker, Syarikat Air Johor Sdn Bhd (SAJ). PAAB, a wholly-owned company under the Minister of Finance Incorporated, has been making fixed monthly payments to SWC and ESB since February 2010 and March 2010 respectively pursuant to PAAB’s acquisition of water assets in Johor in 2009. Trade receivables outstanding of SWC fell significantly to RM8.1 million as at December 31, 2010. ESB likewise saw more timely revenue collection, with significant reduction in receivables. Previously, it was observed that SWC and ESB only received RM4.0 million (about 18%) of their monthly billings of approximately RM22 million. MARC no longer considers slow receivables collection as a key risk to AIRB’s rating.

During the financial year ended December 31, 2010 (FY2010), revenue decreased by 3.6% to RM72.4 million (FY2009: RM75.1 million) as a result of lower fixed monthly payment rate and decrease in water supply of around 5% attributed to severe drought in some parts of Johor, mainly Batu Pahat and Kluang. Pre-tax profit, on the other hand, increased to RM43.2 million due to an increase in AIRB’s share of profit from associated companies to RM28.5 million in FY2010 from RM9.0 million in FY2009. AIRB reported a lower operating profit margin of 23.18% in FY2010 (FY2009: 48.24%). AIRB’s FY2009 results had benefitted from a RM32.7 million write-back of debts in contention due to the settlement of past due receivables from SAJ.

In FY2010, AIRB received dividends of RM76.95 million. Its strong cash balance of RM171.0 million as at December 31, 2010, despite substantial dividend payments amounting to RM66.2 million in May and September of 2010 should cover its planned capital expenditure for refurbishment of concession assets amounting to RM22.3 million in 2011 and the final redemption of the November 2011 outstanding RCULS in full. The trustee-controlled SFA is fully-funded ahead of the principal repayment due in November 2011 of RM28.5 million.

MARC will withdraw AIRB’s rating following the repayment of the RCULS.

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