MARC has affirmed its AA-IS rating on SAJ Capital Sdn Bhd’s Sukuk Murabahah of up to RM650.0 million. The rating outlook is stable.
SAJ Capital is 100%-owned by Ranhill Capital Sdn Bhd, which holds an 80% interest in Ranhill SAJ Sdn Bhd (RSAJ), the sole water treatment operator and treated water distributor in Johor. SAJ Capital functions only as a single-purpose funding conduit for the sukuk issuance and is reliant on dividends from RSAJ as the source of sukuk repayments. SAJ Capital’s rating therefore reflects the credit strength of RSAJ.
RSAJ’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. RSAJ is currently in its fourth operating period (January 2018 – December 2020) of a 45-year Facility Agreement (2009 – 2054) with the national water asset owner, Pengurusan Aset Air Berhad (PAAB). Water demand in Johor has shown steady growth each year, averaging 3.4% per annum over the past six years, which bodes well for RSAJ. In 2019, RSAJ’s revenue rose 3.0% y-o-y to RM1.23 billion on higher water consumption (+3.0%) in the state, while pre-tax profit grew a strong 60% to RM264.4 million, supported by broader operating profit and lower financing cost. RSAJ paid approximately RM130.5 million in dividends to SAJ Capital (via Ranhill Capital Sdn Bhd) in 2019, which was sufficient to meet its first sukuk principal payment of RM40.0 million in January 2020.
Moderating the rating is the uncertainty around the timing of water tariff increases resulting in a possible mismatch between revenue and operational costs, which could then affect profitability and cash flow generation. Under MARC’s sensitised scenario assuming a normal growth rate of circa 3% and no tariff hikes, SAJ Capital is likely to meet its covenanted minimum financial service cover ratio (FSCR) of 1.5x in the next three years. However, the FSCR could come under the minimum requirement in later years without a tariff adjustment. MARC believes that RSAJ could negotiate with PAAB to scale down or defer some of its capex plans, which would correspondingly reduce RSAJ’s lease obligations in future periods.
RSAJ is also exposed to licensing risk, although MARC views this risk as low given RSAJ’s well-established operations in water treatment and distribution, and strong performance record in meeting the key performance indicators set by the regulator, National Water Services Commission (SPAN).