MARC has affirmed its AAAIS rating on Gas
District Cooling (Putrajaya) Sdn Bhd’s (GDC Putrajaya) RM300 million Al-Bai’
Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook.
The affirmed rating reflects a three-notch uplift from GDC Putrajaya’s
standalone credit profile, which is assessed at AA-. The rating uplift is
premised on MARC’s assessment on the strength of parental support from GDC
Putrajaya’s immediate shareholder Putrajaya Holdings Berhad (PJH), which
carries a long-term credit rating of AAA/stable from MARC. The rating agency
considers GDC Putrajaya as a strategic wholly-owned subsidiary of PJH based on
the company’s specific role as the sole supplier of chilled water in Putrajaya
and past evidence of financial support extended by the parent to the subsidiary.
GDC Putrajaya’s standalone rating is supported by its very strong
competitive position, modest leverage position and steady revenue stream
generated under long-term offtake agreements to supply chilled water to
government premises in Putrajaya. The standalone rating, however, has come
under increased pressure from weakening operating profit margins following the
implementation of gas subsidy rationalisation in 2H2015 that has led to rising
gas and utility costs. MARC notes that given the absence of a fuel cost
pass-through mechanism in most of its offtake agreements, GDC Putrajaya has to
absorb the increase in gas costs, which reduces its profitability. For 1H2016,
GDC Putrajaya’s operating profit margin fell to 3.5% from 17.3% in the previous
corresponding period; its profit before tax declined by 92.0% y-o-y to RM1.0
million despite a 7.8% y-o-y increase in revenue to RM95.6 million in 1H2016.
MARC notes that under the offtake agreements, chilled water tariff rates
will increase by 9% every three years, with the next revision in 2017. However,
the uptick in tariff rates could be offset by higher gas prices which are
expected to increase by 18% in 2016 and 15% in 2017. MARC understands that the
company is currently negotiating with the government on a tariff restructure to
enable the transfer of any increase in natural gas prices to end-users. Should
the restructuring efforts not yield the desired outcome to improve its margins,
there is a high likelihood that GDC Putrajaya’s standalone rating would be lowered.
GDC Putrajaya has six wholly-owned gas district cooling plants with a
combined capacity of 89,280 refrigeration tonnes. Its key customer, the
government, consumes 86.6% of its supply, followed by its parent PJH at 10.1%
and third parties at 3.3% in 1H2016. The company receives payments from the
offtakers in two forms: demand and variable charges. The demand charges are
payable irrespective of offtake volumes, providing GDC Putrajaya with a steady
revenue stream. MARC regards the demand charges, which accounted for 69.5% of
GDC Putrajaya’s revenue in 1H2016, to mitigate demand risk. Variable charges
are based on the actual quantity of chilled water delivered and are expected to
increase in tandem with the increase of government and commercial buildings in
Putrajaya.
Cash flow from operations (CFO) declined to negative RM2.2 million in
1H2016 (1H2015: positive RM8.6 million) on the back of higher utility and gas
costs as well as delay in payments from a few offtakers due to administrative
issues. The debt-to-equity ratio remained unchanged at 0.27x as at end-June
2016, with total outstanding debt standing at RM100.0 million under the rated
BaIDs; the next scheduled payment is due in December 2017 (RM50.0 million) and
the final payment in December 2022 (RM50.0 million). Its cash balance stood at
RM50.5 million as at end-June 2016 and MARC expects financial support from its
parent to be forthcoming if necessary, as has been demonstrated in the past.
The stable outlook is underpinned by MARC’s expectation that PJH will
continue to offer GDC Putrajaya financial support in relation to the BaIDS debt
obligations. Downward rating pressure could be triggered if there is a material
change in the support assumption and/or GDC Putrajaya’s financial metrics continue
to deteriorate.
Contacts: Joan Leong, +603-2082 2270/ joan@marc.com.my, Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.
November 30, 2016
