MARC Ratings has affirmed its AA-IS rating 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 80% of 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. The rating agency notes the recent change in shareholding at the ultimate parent Ranhill Utilities Berhad, which owns 100% of Ranhill Capital, and views that it would not have a material impact on the overall credit of Ranhill SAJ.
The rating is premised on Ranhill SAJ’s solid business position as the exclusive provider of treated water in Johor, and its strong operating track record. These qualities support a stable cash flow profile of about RM560 million in earnings before interest, tax, depreciation and amortisation (EBITDA), mid-40% EBITDA margins, and around RM430 million in cash flow from operations yearly (average over the past five years). In 2023, water consumption increased by 3.7% to 531.1 million cubic metres (m3) alongside population and economic growth. Revenue rose 10.4% y-o-y to RM1.27 billion in 2023, driven by the 6%-11% rate increase for the commercial category combined with the higher consumption rate. Assuming consumption levels do not change, revenue would increase by another 10% to around RM1.4 billion in 2024 given the recent tariff increases effective February 2024 (household tariffs: up by 15 sen to 35 sen/m3; commercial tariffs: up by 5 sen/m3).
Since rates are governed by the government through Suruhanjaya Perkhidmatan Air Negara (SPAN), any operating cost increases that outpace growth in water tariffs could put pressure on profitability and cash flow generation. However, tariffs are reviewed every three years for adjustments, although this is subject to regulatory approval. As regards licensing risk, MARC Ratings continues to view the risk as low given Ranhill SAJ’s well-established operations in water treatment and distribution, and its strong performance record in meeting the key performance indicators set by SPAN. Ranhill SAJ is currently in its sixth operating period (January 2024 – December 2026).
Ranhill SAJ’s base case projections assume dividend payments of RM100.0 million to RM140.0 million p.a. to its shareholders over 2024-2028, or RM80.0 million to RM112.0 million to SAJ Capital for its 80% share. Under this scenario, SAJ Capital’s financial service cover ratio (FSCR) is projected to remain strong at an average of 2.3x for the five-year outlook period through 2028, above the covenanted 1.5x. MARC Ratings views covenant headroom as adequate; a break-even analysis indicates that SAJ Capital will require a minimum annual dividend of about RM75.0 million from Ranhill SAJ to meet the FSCR covenant.