MARC Ratings has affirmed its MARC-1IS/AAIS ratings on Alam Flora Sdn Bhd’s RM700 million Islamic Commercial Papers and Islamic Medium-Term Notes (ICP/IMTN) programmes with a stable outlook.
The rating affirmation remains underpinned by the strength of Alam Flora’s long-term concession agreement (CA) for waste collection and public cleansing with the Government of Malaysia. The affirmation incorporates the group’s expertise and lengthy operational track record, as well as its predictable cash flow generation and robust liquidity position. These factors are moderated by execution risk on its non-concession business, among which are the construction of a material recovery facility in Selangor and port reception facilities in Johor and Penang, and the development of three other projects (an integrated eco-recovery complex, and two scheduled waste management facilities). The ratings also consider Alam Flora’s moderate equity base relative to the size of the sukuk programme.
Group revenue grew by 5.1% y-o-y to RM869.4 million in 2022, mainly through the addition of new developmental areas and ad-hoc services under its concession business. Growth was also supported by contributions from new private waste collection and public cleansing contracts and increased recycling activities under the non-concession business. However, pre-tax profit declined slightly to RM140.7 million due to higher non-concession fleet costs to operate the transfer station and leachate treatment plant. We also note that the operations and maintenance contract for these facilities expired in June 2023 and will not be renewed as they will be decommissioned. These facilities contributed to about 3.5% of the group’s revenue in 2022. This revenue loss is expected to be offset by growth in its concession business in 2023.
Revenue growth is expected to be around 6%-9% between 2024 and 2026 as its new non-concession projects come online. By 2026, the non-concession business is expected to contribute roughly RM259.1 million or 24% of group revenue (2022: RM113.9 million, 13%).
Cash flow from operations (CFO) was lower at RM69.2 million during the period mainly due to timing of payment collection. The group’s capital structure currently remains debt free. Post sukuk issuances between 2H2023-2025, CFO interest and debt coverage are expected to be around 8.0x-9.0x and 0.3x-0.4x over the next five years. We note that the planned issuances are structured to be fully repaid within the remaining concession period. However, any further issuances with repayments beyond the current CA period could introduce repayment risk if the CA is not renewed and/or if other mitigating factors are not in place. The group has a strong liquidity position with RM307.9 million in cash and bank balances as at end-2022.