MARC has affirmed its AA-_IS rating on Tanjung Bin O&M Berhad’s (Tanjung Bin O&M) 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 to top up any cash 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 revenue stream that Tanjung Bin O&M generates as the operations and maintenance (O&M) services provider of the 2,100MW power plant owned by Tanjung Bin Power Sdn Bhd (TBP). Both MPower and TBP are subsidiaries of Malakoff Corporation Berhad (Malakoff). 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 (TNB, AAA/Stable).

Tanjung Bin O&M’s revenue mainly comprises fixed operating and variable operating fees which are based on the TBP plant’s net electricity output. During 1H2020, the TBP plant’s electricity output declined slightly by 1.3% y-o-y due to the movement control order (MCO) compared to the domestic power industry’s decline of 8.5% y-o-y. This is because the TBP plant has been used as a base-load power plant which has priority in demand for electricity dispatches from TNB. MARC understands that the TBP plant’s electricity output has since returned to its pre-MCO level as at June 2020.

Tanjung Bin O&M’s revenue declined slightly to RM173.2 million while pre-tax profit was higher at RM51.7 million (1H2019: RM177.2 million; RM38.2 million). The improvement in profitability is attributed to lower operating expenses following decreased maintenance works at the TBP plant. Tanjung Bin O&M has healthy cash balances in the revenue account and FSRA totalling RM132.5 million as at end-September 2020. This is sufficient to service its sukuk obligation amounting to RM70.3 million due in July 2021.

MPower’s credit strength lies mainly in its predictable revenue generation as the O&M operator of Malakoff’s majority-owned domestic power plants. It also receives dividend and principal redemption from its holding of redeemable preference shares issued by some of these power plants.

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 Tanjung Bin O&M’s ability to meet its financial obligations.

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