MARC has affirmed its AAA_IS rating on Gas District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook. The current outstanding of RM50 million BaIDS is payable on December 2, 2022.

The affirmed rating incorporates a three-notch uplift for parental support from Putrajaya Holdings Berhad, which carries a AAA/stable rating from MARC. GDC Putrajaya’s standalone credit profile reflects its sustainable business model under which about two-thirds of its business comes from long-term offtake agreements with the government, providing good visibility on future cash flows. As it generates more than 80% of its income from contractual take-or-pay fixed demand charge, exposure to actual consumption or demand risk is substantially mitigated. We also view GDC Putrajaya’s market position as the sole provider of essential chilled water or cooling services to government and commercial buildings in Putrajaya as strong. Contract renewal risk is deemed low given GDC Putrajaya’s monopoly on district cooling in Putrajaya, its long-term client relationships, and well-established track record since 1999.

Moderating the aforementioned strengths, however, is the absence of a full cost pass-through mechanism in the government offtake agreements, which has led to fluctuations in operating profit margins. In respect to gas price, as this is reset every three months based on the Malaysia Reference Price effective July 1, 2020, a timing mismatch between gas price revisions and tariff increases (every three years) has exposed GDC Putrajaya to fuel price volatility, particularly in the absence of a cost pass-through mechanism in the government offtake agreements at present.

GDC Putrajaya’s performance in 2020 was not significantly affected by the coronavirus pandemic, with chilled water consumption volume declining by just 2.4% y-o-y to 176.6 million refrigeration tonnage hours (RTh). For 1H2021, the volume was resilient at 82.9 million RTh vis-à-vis 83.2 million RTh in the previous corresponding period. Revenue and profitability levels remained favourable, with a wider operating profit margin of close to 39% due to cheaper dry gas (lower by about 27% y-o-y).

We expect flat to low single-digit revenue growth for full year 2021. However, operating margin is likely to moderate in 2H2021 vis-à-vis 1H2021 on expected higher input costs (dry gas). The company’s liquidity as reflected by cash of RM53.3 million as at end-June 2021 is sufficient to meet its existing debt of RM50.7 million.

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