Tuesday, Dec 17, 2019
MARC has affirmed its AA-IS rating on Tanjung Bin O&M Berhad’s
RM470.0 million Islamic Securities (Sukuk Wakalah) with a stable outlook.
The rating reflects the credit strength of the issuer’s parent,
Malakoff Power Berhad (MPower), which has provided an unconditional and
irrevocable undertaking in the form of cash deficiency support to top up any
shortfall in the finance service reserve account (FSRA) for the Sukuk Wakalah.
MARC has applied a full credit substitution approach on Tanjung Bin O&M’s
credit risk assessment with MPower’s senior credit rating of AA-/Stable serving
as the rating floor.
The rating is supported by the fairly predictable cash flow that
Tanjung Bin O&M generates as the operations and maintenance services
(O&M) provider of the 2,100MW power plant owned by sister company Tanjung
Bin Power Sdn Bhd (TBP), a subsidiary of Malakoff Corporation Berhad
(Malakoff), the parent of MPower. The rating also incorporates the partial
transfer of operational risks to MPower via a sub-operations and maintenance
agreement (sub-OMA). The OMA and sub-OMA are coterminous with the 25-year power
purchase agreement between TBP and Tenaga Nasional Berhad.
Tanjung Bin O&M’s revenue mainly consists of fixed operating
fees and variable operating fees, which are based on the TBP plant’s net
electricity output. In 2018, revenue declined by a marginal 0.2% to RM339.5
million, due to lower electricity dispatch of 15,566 GWh (2017: 15,856 GWh).
However, pre-tax profit declined to RM41.9 million (2017:RM51.0 million) on
higher finance costs, which are expected to remain high given that interest on
amounts due to the holding company and immediate holding company would be
accounted for from 2018 onwards. Revenue is expected to grow in 2019 with the
increase in fixed and variable income by 4.0% each as per the OMA, which would
moderate the impact from higher planned outages for scheduled maintenance in
the year.
Cash flow from operations (CFO) stood lower at RM43.4 million
mainly due to payment of payables for the scheduled maintenance outages. The
company does not have any sukuk repayment in 2018 and built-up its liquidity
position to meet future obligations. The sukuk outstanding was RM290.0 million
as at end-September 2019. Cash balance stood higher at RM174.0 million. Based
on cash flow projections, Tanjung Bin O&M’s CFO can cover sukuk obligations
except for 2021, during which the first of three major overhauls scheduled over
the remaining sukuk tenure will occur. In this regard, Tanjung Bin O&M
would need to rely on retained cash in 2021 as its total financial obligations
of RM70.3 million under the Sukuk Wakalah will coincide with a major overhaul
which is budgeted to cost RM50.0 million.
Its parent MPower undertakes the O&M of Malakoff’s majority-owned
domestic power generation facilities and receives dividend income from
redeemable preference shares (RPS) in the group’s subsidiaries/independent
power producers including TBP. MPower’s cash generation capacity mainly relies
on the utilisation level of the TBP power plant and residual earnings of
dividend and principal redemption of RPS.
The stable outlook incorporates MARC’s expectation that the TBP
power plant will sustain its performance and MPower will maintain its credit
profile to support its ability to meet its financial obligations. Any material
changes in the credit quality of MPower or TBP would lead to downward rating
pressure given the substantial operational and financial linkages between the
entities.
Contacts:
Chia Kah Yie, +603-2717 2961/ kahyie@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my