MARC has affirmed its AAA_IS rating on Gas District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook.

The rating affirmation factors in a three-notch rating uplift for parental support from Putrajaya Holdings Berhad (PJH) on which MARC maintains a long-term credit rating of AAA/stable. The support assessment considers GDC Putrajaya as a strategic wholly-owned subsidiary of PJH given the company’s specific role as the sole supplier of chilled water in Putrajaya and past evidence of financial support extended by the parent. GDC Putrajaya owns six district cooling plants that supply chilled water to government premises and commercial buildings within the vicinity of Putrajaya.

The stable outlook is underpinned by MARC’s expectation that GDC Putrajaya will continue to receive financial support if necessary from its parent PJH. Any material change in the support assumption and/or significant weakening in GDC Putrajaya’s credit profile may lead to downward rating pressure.

GDC Putrajaya’s standalone credit profile reflects its monopolistic position and steady revenue stream generated under long-term offtake agreements. Under the agreements, GDC Putrajaya receives demand charges irrespective of offtake volumes. It also receives variable charges based on the actual quantity of chilled water delivered. The demand charges have continued to provide GDC Putrajaya with a steady revenue stream, accounting for 70.8% of GDC Putrajaya’s revenue of RM104.2 million in 1H2018. However, operating costs continue to be pressured by increases in gas price given lack of a cost pass-through mechanism in the offtaker agreements to the government which remains GDC Putrajaya’s key customer, consuming 81.2% of total chilled water supplies in 1H2018 (2017: 84.1%). Operating profit margin fell by 3.9% y-o-y in 1H2018 to 12.7%. Given the rapid increases in the gas price, estimated at 13% and 12% in 2018 and 2019, GDC Putrajaya’s earnings would remain under pressure unless it achieves a meaningful outcome in negotiations with the government to restructure the chilled water tariffs.

GDC Putrajaya last received a hike in chilled water tariffs in January, with the next hike expected in 2020; the tariffs are scheduled to increase by 9% every three years. GDC Putrajaya’s plants are currently underutilised with ample spare capacity although the load factor could improve as more new government buildings in the vicinity are completed. MARC also notes that the majority of the offtake agreements with the government are set to expire in 2021; nonetheless, non-renewal risk is low given GDC Putrajaya’s monopolistic position in the supply of chilled water in Putrajaya.

In 1H2018, pre-tax profit decreased 30.5% y-o-y to RM10.7 million in 1H2018, owing mainly to a hike in the gas price. Cash flow from operations (CFO) declined to RM13.7 million in 1H2018 from RM68.1 million in 2017 due to a significant increase in receivables owing to payment delay from the government due to administrative issues and from a commercial client which is under receivership. The company registered negative free cash flow of RM51.3 million due to higher capex of RM65.0 million (1H2017: RM18.4 million). The higher capex was part of a planned capex amounting to RM200 million to be spent through 2019 for the replacement of ageing equipment and expansion. The capex is expected to be largely funded by its parent PJH through shareholders’ advances.

Its cash balance of RM8.7 million as at end-1H2018 is expected to improve by the end of 2018 as regular payments are being made by the government. As at end-June 2018, GDC Putrajaya’s debt-to-equity (DE) ratio was 0.13x and total debt was RM50.3 million, of which RM50 million is the outstanding BaIDS due in December 2022. MARC notes that GDC Putrajaya has ample time to build up its cash reserves for the final repayment of BaIDS. Additionally, the company could also rely on its parent for financial support if needed.

Contacts:
Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my,
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.