Tuesday, Dec 19, 2023
MARC Ratings has assigned preliminary ratings of MARC-1IS/AA-IS to Malakoff Power Berhad’s (MPower) proposed Islamic Commercial Papers / Islamic Medium-Term Notes (ICP/IMTN) programmes of up to RM1.2 billion with a stable outlook. Concurrently, the rating agency has also affirmed its AA-IS rating on MPower’s outstanding RM2.09 billion Sukuk Murabahah with a stable outlook.
MPower, a wholly-owned subsidiary of Malakoff Corporation Berhad (Malakoff), is the operations and maintenance (O&M) operator of independent power producers (IPP) held through companies that are majority-owned by its parent. Given the operational linkages between Malakoff and MPower as well as their reliance on residual cash flows from the IPP companies, the rating approach is premised on their consolidated credit profile. The Kafalah guarantee provided by Malakoff on the existing Sukuk Murabahah programme in favour of MPower’s sukukholders underscores the rating approach; a similar guarantee will be extended to the ICP/IMTN programmes as well.
The ratings are underpinned by sufficient and predictable cash flows from Malakoff’s IPP companies and waste management subsidiary Alam Flora Sdn Bhd to service MPower’s obligations. The IPP companies have long-term power purchase agreements (PPA) with Tenaga Nasional Berhad (TNB) (AAA/Stable), while Alam Flora has a long-term concession agreement with the Government of Malaysia. The ratings also consider the group’s expansion into renewable energy projects that will partly mitigate the expiring PPAs of existing power plants. Moderating the ratings are risks associated with plant performance as well as execution risks in relation to the development and construction of the latest renewable projects.
The proceeds from the proposed first issuance of RM493.0 million under the ICP/MTN programmes will be mainly utilised to finance two new renewable energy projects under its subsidiaries, RP Hydro (Kelantan) Sdn Bhd (84.0MW) and WTE Sg Udang Sdn Bhd (22.1MW), which have long-term power purchase and concession agreements. The projects are expected to be completed in 2Q2026 and 2Q2027. Malakoff also plans to utilise approximately RM132.0 million from this issuance to potentially acquire a 49% stake in environmental solutions company E-Idaman Sdn Bhd that has concession agreements for waste management in Kedah and Perlis.
MARC Ratings views that operational cash flows from existing assets would be more than sufficient to meet sukuk obligations during the construction phase of the new renewable energy projects. Furthermore, the repayment profile of the ICP/IMTN programmes, with the first principal repayment only due in 2029, provides a comfortable buffer period for Malakoff to rectify any teething issues arising from the projects during both pre- and post-construction phases. Execution risk associated with the RP Hydro project is partly mitigated by engagement with an experienced technical advisor.
In 9M2023, Malakoff group revenue stood 7.8% lower y-o-y at RM6.8 billion mainly due to lower energy payments as coal prices were lower compared to the previous year’s corresponding period. The decline in coal prices also gave rise to a net negative fuel margin and pre-tax loss of RM645.1 million during the period.
Cash flow from operations stood higher at RM1.0 billion on the back of higher PPA payment receipts during the period. The group’s liquidity position remains healthy with cash balances standing at RM2.9 billion as at end-September 2023. Following completion of the acquisition of RP Hydro and consolidation of its outstanding project financing, group borrowings increased to RM9.2 billion as at end-September 2023 (end-2022: RM8.7 billion). The rating agency expects the borrowings level to gradually come down in the next four years as repayments on outstanding borrowings exceed additional borrowings taken on to fund capex.
As an O&M operator, MPower’s revenue is derived from fixed and variable (dispatch-based) O&M fees from the group’s thermal IPPs. In 1H2023, revenue stood 14.9% lower y-o-y due to the decommissioning of its GB3 plant, as well as lower overall dispatch at Malakoff’s plants. The company also recorded pre-tax loss of RM13.5 million due to high operating expenses incurred for overhaul and maintenance work. Combined cash balances at MPower and holding company Malakoff remain sufficient at RM471.3 million as at end-November 2023.
Contacts:
Neo Xue Wei, +603-2717 2937/ xuewei@marc.com.my
Ahmad Kamal Syauki, +603-2717 2958/ kamal@marc.com.my
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my