MARC AFFIRMS ITS MARC-1IS/AAAIS RATINGS ON PINNACLE TOWER SDN BHD’S ISLAMIC CP AND MTN PROGRAMME

Oct 18, 2012 -

MARC has affirmed its ratings of MARC-1IS and AAAIS on Pinnacle Tower Sdn Bhd’s (Pinnacle Tower) RM50 million Islamic Commercial Papers (ICP) and RM400 million Islamic Medium Term Notes (IMTN) respectively with a stable outlook. The rating action affects RM285 million of outstanding notes issued under the programme.

Pinnacle Tower is a wholly-owned special purpose funding vehicle of Sacofa Sdn Bhd (Sacofa), a 70.5% State Financial Secretary of Sarawak-owned entity. Sacofa, which is engaged in trading and provision of services in telecommunication infrastructure and related businesses in Sarawak, has business revenue from rental of towers, bandwidth services and fiber core. Tower rental remains the mainstay of the group, contributing 67% of total revenue in the financial year ended December 31, 2011 (FY2011) (FY2010: 74%) while the bandwidth segment contributed 31% (FY2010: 24%). Sacofa constructed 21 towers compared to the projected 60 towers in 2011, and revised its annual construction projection to five new towers a year for the remaining tenure of the programme. The lower-than-projected number of towers and the trend towards the construction of smaller and shorter towers reflect increased network infrastructure sharing among telecommunication companies (telcos) to reduce costs. Sacofa also acquired 106 existing unauthorised towers from the telcos to regularise illegal towers in Sarawak in line with the policy and direction of the State Government of Sarawak (SGS). As at end-December 2011, Sacofa owns 605 towers, of which 79% have more than a single user. As one of the designated universal service providers for the Time 3 (T3) Universal Service Provision (USP) programme (T3 Programme), Sacofa has to date constructed 142 towers, which are owned by the Malaysian Communications and Multimedia Commission (MCMC). Meanwhile, Sacofa upgraded both its on-land and submarine bandwidth networks in view of its fiberisation leasing agreements with Celcom Axiata Bhd (Celcom), Maxis Bhd (Maxis) and DiGi Telecommunications Sdn Bhd (DiGi).

The ratings reflect the quality of the revenue stream assigned to debt service of notes issued under the programme as well as Sacofa's exclusive rights to construct telecommunication towers and structures in Sarawak. Sacofa, given its status as a government-related entity of SGS and the strategic role it plays in the development of telecommunication infrastructure in the state, is perceived to benefit from a very high likelihood of support from the state, as demonstrated by support extended to Sacofa in the past to ensure compliance with its debt covenants. Without the perceived support, the long-term rating on the outstanding notes would be AA. The stability and predictability of the assigned revenue stream is derived from the strong financial profiles of the telcos and the contractual lease rental rates under a ten-year Master Licence Agreement between the telcos and Sacofa. The latter receives monthly lease payments for use of the towers, which MARC considers to be subject to very low credit risk on the basis of offtaker credit strength. A shareholding maintenance covenant which obliges SGS to maintain a minimum 51% shareholding in Sacofa and the available structural enhancements in the transaction continue to provide support to the ratings.

For FY2011, Sacofa’s revenue increased by 13.8% to RM140.8 million mainly due to higher usage of its bandwidth services. Average utilisation rates for its on-land and submarine networks were at 40.6% (FY2010: 74.6%) and 29.4% (FY2010: 3.1%) as at December 31, 2011. MARC notes that Sacofa increased the total network capacity for both its on-land and submarine networks in 2011. Pre-tax profit rose by 57.5% to RM69.4 million mainly due to project management fees from the T3 Programme amounting to RM12.7 million. Despite Sacofa’s improved operating profitability, cash flow from operations and free cash flow were lower at RM94.6 million (FY2010: RM111.7 million) and RM50.6 million (FY2010: RM93.5 million) respectively mainly due to an increase in working capital levels arising from the construction of towers for the T3 Programme. Nonetheless, Sacofa’s cash flow from operations interest coverage remained strong at 5.29 times (x) (FY2010: 5.73x). Sacofa’s cash and bank balances of RM186.2 million as at end-December 2011 (FY2010: RM183.5 million) indicate good balance sheet liquidity. Sacofa has repaid RM115 million since the inception of the notes programme, leaving RM285 million of notes outstanding. As a result of Sacofa’s steady paring of its debt and internal capital generation, its gearing as measured by debt-to-equity improved to 1.46x as at end-December 2011 (FY2010: 2.08x).

The stable outlook reflects the expectation of sustained steady and timely lease payments from the telcos as well as continued improvement in Sacofa’s credit metrics.

Contacts:

Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;

Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.