MARC has affirmed its ratings of AAA_IS(bg) and AAA_IS(fg) on Ranhill Capital Sdn Bhd’s (RCSB) RM300 million bank-guaranteed (Tranche 1) and RM500 million Danajamin-guaranteed (Tranche 2) Sukuk Musharakah facilities respectively. The outlook on the ratings is stable. The ratings on Tranche 1 and Tranche 2 reflect the credit strength of Maybank Islamic Berhad (Maybank Islamic) (AAA/Stable) and Danajamin Nasional Berhad (Danajamin) (AAA/Stable), both of which have provided unconditional and irrevocable guarantees on the respective tranches of the sukuk. The total outstanding under Tranche 1 and Tranche 2 were RM110 million and RM430 million respectively at end-September 2017.

RCSB, an intermediate holding company, is a wholly-owned subsidiary of Ranhill Holdings Berhad (Ranhill). Its key subsidiaries are SAJ Ranhill Sdn Bhd (SAJ), which undertakes water operations in Johor, and Ranhill Powertron Sdn Bhd (RPI) and Ranhill Powertron II Sdn Bhd (RPII), the latter two of which are independent power producers in Sabah. The residual cash flows from SAJ and to a lesser extent RPI and RPII remain the principal sources of repayment for the notes issued under the facilities.

SAJ operates water treatment plants and is the sole distributor of treated water in Johor under an exclusive three-year renewable licence, expiring at end-December 2017. Licensing risk is mitigated by SAJ’s good operating record since 1999 and its ability to meet key performance indicators that have been set out by the national water regulator. The company operates on a light asset model and its financial obligations are largely related to lease payments on water infrastructure assets leased from the national water asset management company, Pengurusan Aset Air Berhad (PAAB).

SAJ’s cash flows are reliant on water tariffs which are reviewed at the end of each three-year operating period. MARC observes that while scheduled tariff revisions have not been adhered to in the past, SAJ’s ability to reduce or defer capex spending related to water assets has reduced the impact on its cash flows. SAJ continues to generate steady recurring inflows, attributable to stable and sizeable water operations servicing more than one million households and commercial enterprises in Johor. As at end-March 2017, SAJ’s production capacity stood at 727 million m3 and currently produces 95% of treated water supplied in the state. MARC expects the long-term water demand in the state to be driven by population growth as well as increased economic activities.

Ranhill’s power subsidiaries RPI and RPII have a combined power capacity of 380MW, accounting for about 29% of Sabah’s total power generating capacity. Both plants received full capacity payments and energy payments in 2016; however, their overall performance was affected by a lower load factor given the prevailing excess capacity in Sabah’s power grid. RPII was also plagued by higher scheduled maintenance costs on its gas turbines and financing cost on an outstanding RM624 million non-recourse project debt, which hampered its ability to upstream dividends. In contrast, RPI paid RM58.8 million in dividends, afforded through the release of funds in restricted accounts following the full redemption of its RM220 million bonds in March 2016.

For 1H2017, Ranhill recorded flat consolidated revenue and pre-tax profit of RM719.9 million and RM94.8 million respectively. Total group borrowings declined to RM1.15 billion from RM1.25 billion at end-2016. Group debt-to-equity improved significantly to 1.5 times at end-June 2017 from 4.3x at end-December 2015 on an expanded capital base, the full redemption of RPI’s outstanding RM200 million bonds and the partial redemption of RM100 million under RCSB’s rated sukuk. Further to the improvement in its leverage, MARC highlights that the total outstanding RM608.1 million under Tranche 1 and Tranche 2 has been reclassified under non-current liabilities following the resolution of a covenant arrangement with the guarantors of the tranches. At the holding company level, Ranhill received RM114.9 million in dividends in FY2016, which was sufficient to meet its financial obligations for the year.

Sukukholders are insulated from downside risk related to the credit profile of RCSB by the guarantees provided by Maybank Islamic and Danajamin. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.

Contacts:
Hari Vijay, +603-2717 2937/ harivijay@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my.