MARC has affirmed its AA-IS rating on Malakoff Power Berhad’s (MPower) RM5.4 billion Sukuk Murabahah with a stable outlook.
MPower is the operations and maintenance (O&M) operator of its parent company Malakoff Corporation Berhad’s (Malakoff) majority-owned domestic power plants. The rating considers the consolidated credit profile of MPower and Malakoff, in view of the strong operational and financial linkages between both entities and the explicit Kafalah guarantee provided by Malakoff in favour of the sukukholders. The rating mainly reflects the predictability of cash flows from Malakoff’s power plant portfolio under long-term power purchase agreements (PPA) with Tenaga Nasional Berhad to meet the sukuk obligations.
Malakoff’s financial performance was generally in line with MARC’s expectations. Revenue from continuing operations (excluding the Macarthur wind farm) increased 1.3% y-o-y to RM7.3 billion in 2019, mainly due to higher energy payments from Segari Energy Ventures Sdn Bhd (SEV) in line with its increased despatch factor, and higher capacity payments from Tanjung Bin Energy Sdn Bhd (TBE) following a shorter unplanned outage duration. Both SEV and TBE are among Malakoff’s key power producers. Malakoff’s pre-tax profit declined 2.2% y-o-y to RM479.5 million, mainly due to investment impairment on an associate company. Cash flow from operations was healthy at RM2.2 billion.
Malakoff group’s leverage position as reflected by the debt-to-equity ratio improved to 1.86x (2018: 2.28x) from the deconsolidation of project debt following the disposal of the Macarthur wind farm in December 2019, and repayment of some borrowings. Its leverage is expected to improve further on scheduled repayment of MPower’s sukuk obligations and by the fact that it has no major plans to undertake any debt-funded capex in the near term. As at end-December 2019, the outstanding sukuk was RM3.34 billion.
The rating agency notes that Malakoff’s disposal of the Macarthur wind farm could affect its profitability in the near term as the wind farm had contributed substantial earnings to the group, accounting for 12.0% of group earnings in 2019. Its near-term performance will also be affected by the step-down in the Tanjung Bin Power power plant’s capacity rate financial and, to a lesser extent, by the expiry of the Port Dickson power plant’s PPA. The loss in earnings will be somewhat offset by Alam Flora Sdn Bhd, that was acquired in December 2019 as well as by the higher share of income from the additional 12% equity stake in Shuaibah, a water and electricity co-generation plant in Saudi Arabia, acquired in September 2019.
The stable outlook incorporates MARC’s expectation that Malakoff’s power generating subsidiaries will continue to deliver satisfactory operational and financial performance.