MARC Ratings has affirmed its rating of AA-IS on SAJ Capital 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. As the dividends from Ranhill SAJ form the source of the profit payments and principal repayments of the sukuk, the rating reflects its credit strength.
MARC Ratings notes that Ranhill SAJ has maintained its strong business position as the exclusive provider of essential treated water in Johor on the back of steady water consumption growth, albeit in low single digits. Its customer base is predominantly residential users (about 85% of customer accounts), with the remainder split between commercial (14%) and other users (1%). The commercial segment, which made up over 58% of Ranhill SAJ’s 2022 revenue, would continue to be a major revenue contributor. In 2022, increased commercial consumption (+6.3%) and revenue (+5.8%) had more than offset the 2.0% and 4.6% declines in the residential segment. Overall water consumption and consolidated revenue increased by 1.4% and 1.8% y-o-y to 512.2 million m3 and RM1.12 billion in 2022.
Moderating the rating is that Ranhill SAJ has no independent legal ability to increase service rates without the government’s approval. Operating cost increases that outpace growth in water tariffs could pressure profitability and cash flow generation. Ranhill SAJ is currently in its fifth operating period (January 2021 – December 2023). We see licensing risk as low and expect this to be renewed given the company’s well-established operations in water treatment and distribution, and strong performance record in meeting the key performance indicators set by regulator, National Water Services Commission.
Ranhill SAJ’s base case projections assume dividend payments of RM159.6 million in 2023 and an annual average of RM125 million over 2024-2026 to its shareholders. This could translate into RM100 million – RM128 million of dividend income a year for SAJ Capital for its 80% share. Under this scenario, SAJ Capital’s financial service cover ratio (FSCR) is projected to be strong at an average 3.0x between 2023 and 2026, well above the covenanted 1.5x. We see covenant headroom as adequate; our breakeven analysis indicates that SAJ Capital will require a minimum annual dividend of about RM70 million from Ranhill SAJ to meet the FSCR covenant.