Posted Date: November 21, 2019

MARC has affirmed its AA-IS rating on single-purpose company SAJ Capital Sdn Bhd’s Sukuk Murabahah of up to RM650.0 million with a stable outlook.

SAJ Capital Sdn Bhd is 100%-owned by Ranhill Capital Sdn Bhd which holds an 80% interest in Ranhill SAJ Sdn Bhd (SAJ), the sole water treatment operator and treated water distributor in Johor.

The affirmed rating reflects the credit strength of SAJ with which SAJ Capital’s rating has been equalised to on the basis of the former’s function as a single-purpose funding conduit for the sukuk issuance. Funds for principal and profit payments on the sukuk are derived from dividend payouts from SAJ. SAJ’s long track record in operating water assets, its status as the sole distributor of treated water in Johor and its stable financial performance remain key credit strengths. The main moderating factor is the frequent deferment of water tariff hikes that has led to fluctuating profitability margins, impacting cash flow generation. SAJ is also exposed to licensing risk, given that its licence to operate water assets is renewable every three years by the regulator, National Water Services Commission (SPAN).

SAJ is currently in the fourth operating period (from January 2018 to December 2020) under a 45-year facility agreement (2009-2054) with the national water assets owner, Pengurusan Aset Air Berhad (PAAB). SAJ leases water assets from PAAB and collects water tariff payments from consumers through monthly billings. Water consumption in the state grew 4.7% y-o-y to 500.9 million m3 while total consumer accounts serviced by SAJ rose by 2.1% y-o-y to 1.2 million accounts in 2018.

SAJ’s aggregate water treatment capacity stood at 739.6 million m3 p.a. from 44 water treatment plants as at end-2018. Non-revenue water (NRW) continued to decline to 22.8% as at end-March 2019 (2018: 24.2%). The improvement in NRW metrics is a major key performance indicator (KPI) under SAJ’s operating licence. Licensing risk is further mitigated by its stable operating track record in meeting other KPIs as set out by SPAN.

For 2018, revenue rose by 5.3% y-o-y to RM1.2 billion while pre-tax profit decreased by 20.3% y-o-y to RM165.4 million, owing largely to an increase in finance costs to RM40.4 million (2017: RM14.6 million) on the outstanding lease rental payments for the current operating period. Cash flow from operations (CFO) remained healthy at RM250.2 million after payment of lease rentals for 2018. SAJ has a lean balance sheet as the responsibility of funding all development of water assets in the state lies with PAAB. Additionally, SAJ is prohibited from incurring borrowings unrelated to its licensed activities, further keeping its balance sheet in check.

Due to SAJ’s limited capex and stable working capital requirements as well as its debt-free position, SAJ has been paying out dividend at an average of above 100.0% of its annual net profit for the past five years. SAJ Capital expects to receive about RM76.0 million in dividends in 2019, translating into a finance service coverage ratio (FSCR) of 2.25x. The first principal payment of RM40 million is due in January 2020. Beyond 2020, SAJ Capital is expected to register an FSCR of between 2.34x and 3.56x over the next four years.

MARC’s sensitivity analysis on the company’s cash flows indicates that SAJ’s dividend-paying ability is highly susceptible to the timeliness of water tariff hikes. SAJ expects to receive an 11% tariff hike in end 2019. As the tariff hike will be lower than expected, further increases in lease rental payments will be managed through delays in capex planned for the current operating period.

The stable outlook considers MARC’s expectation that SAJ’s operations will remain on a steady growth trajectory and the company will maintain its ability to upstream dividends as forecast which would continue to provide healthy debt service buffer to SAJ Capital.

Raj Shankar, +603-2717 2956/ rajshankar@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my

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