MARC Ratings has affirmed its rating of AA-IS on SAJ Capital’s Sdn Bhd’s Sukuk Murabahah of up to RM650 million with a stable outlook.
SAJ Capital is a wholly-owned funding vehicle of Ranhill Capital Sdn Bhd, which owns an 80%-stake in Ranhill SAJ Sdn Bhd, an exclusive provider of treated water in Johor. As the dividends from Ranhill SAJ form the source of the profit and principal repayments of the sukuk, the rating reflects its credit strength.
Ranhill SAJ’s solid position and healthy track record in the distribution of treated water in Johor that has enabled it to generate stable operating cash flow (CFO) remain key rating drivers. CFO post-lease payments rose 32.7% y-o-y to RM169.4 million in 2021, comparatively consistent with past years’ levels and aligned with the rating agency’s expectations that the operating performance will continue to remain robust. Volume and revenue from water usage were down marginally by 0.5% and 0.8% to 504.9 million m3 and RM1.1 billion. We, however, expect these to show moderate growth in the medium term on the basis that the projected water demand will increase by between 2.1% and 3.7% through 2024.
The rating is, however, moderated by a lack of pricing flexibility—that could lead to margin pressures—and exposure to licensing risk. The latter is considered low given Ranhill SAJ is currently in its fifth operating period (January 2021 – December 2023) with a long history of contract renewal, which suggests that its operating performance has been able to satisfy key performance index (KPIs) as set by the regulatory body.
Base case financial service cover ratio (FSCR) averages 3.2x over a three-year forecast period to 2024 with a minimum of 3.02x, well above the covenanted 1.5x. In 2021, SAJ Capital received a dividend of around RM72.0 million and on average, has received RM107.4 million for the past five years. Our breakeven analysis indicates that SAJ Capital will require a minimum annual dividend of around RM50 million to RM55 million from Ranhill SAJ for the issuer to meet the FSCR covenant.