MARC Ratings has assigned preliminary ratings of MARC-1IS/AAIS to Alam Flora Sdn Bhd’s RM700.0 million ICP/IMTN programmes with a stable outlook.
The assigned ratings are primarily driven by the strength of Alam Flora’s 22-year concession agreement (CA) with the Government of Malaysia that provides revenue visibility until 2033. The ratings also incorporate 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 and by its moderate equity base relative to the proposed sukuk.
Alam Flora provides waste collection and public cleansing services (concession business) to Kuala Lumpur, Putrajaya and Pahang, fees from which made up about 89% of group revenue in 2021. The balance is contributed by its non-concession business encompassing waste processing and solutions, integrated facility management and recycling activities. Future growth would primarily be driven by the non-concession business as the group plans to diversify its revenue base. Accordingly, about 50% of proceeds from the proposed sukuk issuances will be allocated to four projects in the non-concession business that would expand the segment’s contribution to 30% of group revenue by 2026. The rest will be utilised to replace ageing concession assets.
Under the CA, Alam Flora receives monthly fixed-rate fees for carrying out its services. Payments are received on a fairly timely basis, underscoring the low counterparty risk of Solid Waste and Public Cleasing Management Corporation, a government supervisory body overseeing the concessionaires. The rating agency observes that Alam Flora has a strong operational track record, meeting its key performance indicators and incurring minimal penalties over the years. Given the operational performance, MARC Ratings opines that concession termination risk is low and at same time, the case for concession renewal upon expiry is strong.
Over the medium term, concession revenue is expected to grow by a modest 2%-3% p.a. in line with the opening of new developments in geographical areas under Alam Flora’s purview. Any sharp revenue growth would be led by its non-concession business projects and associated activities. While the group is exposed to project execution risk, the new projects are related to waste treatment and recovery processes, and within its technical scope, mitigating the associated risks.
Cash flow from operations (CFO) is projected at about RM150.0 million p.a., with healthy CFO interest and debt coverages of 8.0x-9.0x and 0.3x-0.5x over the next five years. In MARC Ratings’ assessment, cash flows from the concession business alone are sufficient to meet sukuk obligations with minimum and average finance service coverage ratios of 3.62x and 6.51x. MARC Ratings observes that Alam Flora has maintained a strong liquidity position, with cash balances standing at RM441.7 million as at end-2021.
Alam Flora currently maintains a debt-free capital structure. The sukuk will be issued on a staggered basis, with the group’s net debt-to-equity ratio projected to peak at 0.65x in 2025 before gradually reducing from 2026 onwards. The planned sukuk issuances between 2022-2025 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.