Posted Date: August 27, 2021

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

SAJ Capital is 100%-owned by Ranhill Capital Sdn Bhd, which has an 80% interest in Ranhill SAJ Sdn Bhd, the exclusive provider of source to tap water in Johor. SAJ Capital serves only to issue the sukuk, while the source for profit payments and principal repayments will be from dividends from Ranhill SAJ. Accordingly, the rating reflects the credit strength of Ranhill SAJ.

Aside from being the sole provider of treated water in Johor, Ranhill SAJ benefits from the state's stable, albeit moderate, population growth and growing industrial activities. Approximately 85% of Ranhill SAJ's customer accounts consists of residential units, lending some stability to water usage in 2020. Impact of the COVID-19 pandemic on volume demand and revenue was minimal, contracting just 1.6% and 5.2% last year.

Ranhill SAJ, however, has no independent ability to increase service rates without the government's approval. Profitability and cash flow could come under pressure if operating cost increases outpace that of water tariffs. Ranhill SAJ is also exposed to licensing risk, although MARC sees this as low given the company's long operating history and strong performance record in meeting the standards set by the regulator, National Water Services Commission.

Given stable water demand characteristics, we expect Ranhill SAJ's operating performance to remain robust to distribute sufficient dividends and support SAJ Capital's financial obligations. In 2020, Ranhill SAJ distributed some RM170.0 million in dividends, of which SAJ Capital received approximately RM136 million for its 80% share. Ranhill SAJ projects to distribute around RM110 million in dividends a year over 2021–2023, translating to approximately RM88 million p.a. to SAJ Capital. Under this assumption, SAJ Capital's finance service cover ratio (FSCR) is projected to be strong at an average 2.5x for the three-year outlook period to 2023, well above the covenanted 1.5x. In the event of a more moderate water revenue growth, Ranhill SAJ's ability to pay dividends as budgeted could decline. In this regard, Ranhill SAJ has flexibility to reduce capex and operating expenditure to shore up its cash flows.

Ahmad Ikmal Mohd Shahril, +603-2717 2963/ ikmal@marc.com.my;
Ati Affira Kholid, +603-2717 2941/ affira@marc.com.my;
Hafiza Abd Rashid, +603-2717 2955/ hafiza@marc.com.my.