MARC Ratings has assigned a preliminary AA-IS rating to Sungai Udang WTE Sdn Bhd’s (SUWTE) proposed RM700.0 million ASEAN Green SRI Sukuk Wakalah Programme, with a stable outlook.
SUWTE is a special purpose vehicle established to develop and operate a 22.1MW waste-to-energy (WTE) facility in Sungai Udang, Melaka, under a 34-year concession agreement (CA) with the government. Electricity generated by the facility will be sold to Tenaga Nasional Berhad (TNB, AAA/Stable) under a 21-year power purchase agreement (PPA). SUWTE is 60%-owned by Malakoff Corporation Berhad (Malakoff), with the remaining 40% held by Alam Flora Environmental Solutions Sdn Bhd (AFES), a wholly-owned subsidiary of Alam Flora Sdn Bhd, which is in turn 97.37%-owned by Malakoff.
The rating reflects the project’s predictable revenue profile, underpinned by gate fee income under the CA and electricity sales under the PPA, as well as its well-structured contractual framework and construction and operational risk mitigants. These strengths are moderated by execution risk associated with the group’s maiden WTE project, particularly its exposure to potential construction delays and cost overruns.
Under the CA, SUWTE receives gate fees based on the tonnage of waste delivered to the facility, with payments made by Solid Waste and Public Cleansing Management Corporation, the federal agency responsible for overseeing solid waste management in Peninsular Malaysia. The PPA requires TNB to purchase electricity generated by the facility up to the agreed capacity, providing revenue visibility and mitigating electricity demand risk. Together, these contractual arrangements underpin the project’s two key revenue streams and reduce its exposure to supply, demand and counterparty risks.
Construction risk of the WTE plant is moderated by the established technical expertise and track record of the engineering, procurement, construction and commissioning (EPCC) consortium, comprising Jurong Engineering Limited (JEL), Kanadevia Corporation (KVC), Equator Engineering Sdn Bhd and Alam Hzem Sdn Bhd. The latter two are Malaysian subsidiaries of JEL and KVC, respectively. Established in 1971, Singapore-based JEL has experience in power generation and industrial projects across Asia, the Middle East and Africa. Meanwhile, Japan-based KVC, formerly Hitachi Zosen Corporation, has been involved in WTE development since 1965. Separately, the transmission and interconnection works are undertaken by MMC Engineering Sdn Bhd.
Completion risk is further moderated by an approximately 19-month buffer between the EPCC scheduled completion date (COD) and the PPA-scheduled COD of 31 December 2030. This provides sufficient headroom to absorb potential construction delays before liquidated damages under the PPA are triggered. Cost overrun risk is mitigated by the fixed-price, turnkey EPCC contract and the presence of a contingency reserve.
Operational risk is moderated by a 21-year operation and maintenance (O&M) arrangement with Sungai Udang O&M Sdn Bhd, jointly owned by Malakoff Technical Solutions Sdn Bhd (35%), AFES (35%) and Taiwan-based ECOVE Environment Services Corporation (ECOVE, 30%). The O&M arrangement benefits from ECOVE’s more than 25 years of WTE experience and track record of operating multiple WTE facilities globally.
Gate fee income is projected to account for approximately 36% of total revenue in 2030, with its contribution expected to increase over time, supported by the anticipated increase in gate fees. Nonetheless, as gate fee income is contingent on the facility’s ability to receive waste, prolonged operational disruptions could adversely affect collections.
SUWTE’s base-case projections indicate strong debt-servicing capacity, with an average and minimum finance service coverage ratio (FSCR) of 2.36x and 2.18x, respectively. Distributions are subject to a minimum post-distribution FSCR of 1.50x. Projected cash flow remains resilient under stress scenarios incorporating a six-month completion delay, a 5% increase in plant outage and operating costs, and a 5% reduction in municipal solid waste deliveries during the first three years.