Published on 01 June 2015
RAM Ratings has reaffirmed the corporate
credit ratings of Al Bayan Holding Company (Al Bayan or the Group) at
AA3/Stable/P1. Concurrently, the AA3(s)/Stable rating of the RM1.0
billion Sukuk Wakalah (2013/2023) issued by the Group’s wholly-owned
subsidiary, ABHC Sukuk Berhad (ABHC), has been reaffirmed.
The ratings reflect Al Bayan’s solid track record in
securing and delivering on large government contracts for various
ministries. More recently, its specialist construction division has
built up a strong presence in niche projects. The Group’s progress and
delivery thus far, combined with its experience in managing government
contracts, had enabled it to grow its total outstanding order book to
SR4.9 billion as at end-December 2014 (end-December 2013: SR3.4
billion). Meanwhile, despite the rapid growth of the construction
division, we view Al Bayan as having a fairly diversified business
profile.
Al Bayan’s adequate debt-protection measures also
support the rating. “Factors such as notable contractual margins and a
favourable operating environment have helped to grow the Group’s funds
from operations (FFO) and earnings. However, substantially increased
debt had thinned its FFO debt coverage to 0.25 times in FY Dec 2014 (FY
Dec 2013: 0.29 times),” notes Kevin Lim, RAM’s Head of Consumer and
Industrial Ratings. Over the next 2 years, we anticipate the Group’s FFO
debt cover improving to about 0.30 times, supported by a slower
increase in debt.
Al Bayan’s borrowings have almost doubled every 2
years, reaching SR1.69 billion as at end-December 2014, with a
corresponding gearing ratio of 0.98 times. The significantly higher than
expected debt level was a result of funding requirements for the
substantial SR2.8 billion of new contracts secured by the Group. We note
the Group’s construction operations have lengthy operating cash cycles,
translating into very high working capital requirements that are mostly
debt funded. The division is also heavily dependent on short-term
project financing facilities. Based on a slower growth in contracts, we
anticipate Al Bayan’s gearing ameliorating to within a range of 0.85
times to 1.0 time over the next 2 years. However, if the Group continues
to secure substantial contracts and/or achieve significantly faster
progression in its construction projects, its gearing and debt-coverage
metrics may deteriorate.
The rating is also moderated by heightened execution
risk faced by Al Bayan due to the rapid expansion of its specialist
construction segment. We remain cautious over the pace of expansion as
the Group may require more time to familiarise itself with the risks in
managing and delivering concurrent large projects. Nonetheless, we
derive some comfort from the progress and timely delivery of projects
within budget to date. Meanwhile, as the bulk of the Group’s earnings
are contract driven, it must constantly bid for new contracts to
replenish its order book.
On a macro perspective, we view positively strong
government-led developments to diversify Saudi Arabia’s oil-based
economic structure and address high unemployment rates. Government
expenditure in this regard is not anticipated to reduce despite the drop
in oil prices. Elsewhere, the Kingdom’s location within a region of
frequent conflicts are threats to its overall stability, although it has
largely avoided financial, social and political unrest in recent years.
Al Bayan is a family-owned Saudi-based conglomerate
with businesses mainly in the specialist construction of public
infrastructure, supply of a wide range of equipment, IT products and
services, primarily servicing the Government of Saudi Arabia. ABHC is a
special-purpose vehicle incorporated in Malaysia to facilitate the sukuk
transaction by Al Bayan. Under a Kafalah agreement in favour of ABHC,
the Group provides an irrevocable and unconditional guarantee to the
holders of the sukuk. As such, the enhanced rating of the sukuk is based
on the Group’s credit profile.
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