MARC has affirmed its AAAIS(fg) rating on investment holding company Senari Synergy Sdn Bhd's (Senari Synergy) RM380 million Islamic Medium-Term Notes (IMTN)

Posted date: November 15, 2016

MARC has affirmed its AAAIS(fg) rating on investment holding company Senari Synergy Sdn Bhd's (Senari Synergy) RM380 million Islamic Medium-Term Notes (IMTN) Programme with a stable outlook. The rating and outlook hinge on the unconditional and irrevocable guarantee provided by Danajamin Nasional Berhad (Danajamin) on the IMTN obligations. Danajamin carries a financial insurer rating of AAA/stable.

Sarawak-based Senari Synergy's standalone credit profile is underpinned by long-term user agreements with credible oil & gas offtakers, which through the usage of Senari Synergy's oil terminals provide predictable but modest cash flows. However, Senari Synergy's large financial obligations as well as several underperforming subsidiaries continue to weigh heavily on the group's financial performance.

Senari Synergy's key subsidiaries Assar Chemicals Sdn Bhd and Assar Chemicals Dua Sdn Bhd own an independent oil terminal (IOT) in Kuching and a centralised oil distribution terminal (CODT) in Tanjung Manis respectively. The IOT/CODT store and distribute petroleum-based products of PETRONAS Dagangan Berhad and Shell Timur Sdn Bhd under 30-year user agreements with a guaranteed pre-tax internal rate of return on equity of 15% regardless of the throughput volume. MARC regards the offtake agreements as insulating the oil terminals' operations from demand and termination risks.

Senari Synergy's underperforming subsidiaries are in the port-related services, refinery services, industrial and property development segments, and continue to rely heavily on parental support. In particular, the group's oil refinery division Assar Refinery Services Sdn Bhd (ARSSB) recorded revenue and operating loss of RM392.3 million and RM2.8 million respectively (2014: revenue of RM479.3 million; operating loss of RM13.3 million). ARSSB currently provides storage and packaging services following the discontinuation of its refinery operations in 2013. With regard to its property segment, Senari Synergy's property arm Assar Hartanah Sdn Bhd is expected to lease its land for the construction of processing plants.

In 2015, Senari Synergy Group reported lower revenue of RM468.3 million and operating loss of RM4.3 million due mainly to RM21.5 million goodwill impairment in relation to the group's refinery business and impairment on other receivables of RM11.5 million. Excluding the impairment loss and goodwill write-off, the company would have recorded operating profit RM28.7 million and RM8.8 million in 2015 and 2014 respectively. Net losses of RM38.5 million in the financial year have reduced the group's shareholders' equity to RM67.3 million (2014: RM105.6 million), leading to a higher adjusted debt-to-equity (DE) ratio of 2.59 times (x) in 2015 (2014: 2.15x).

The group registered higher cash flow from operations (CFO) of RM88.8 million (2014: RM47.5 million) on the back of lower working capital. Coupled with lower capex, the group's cash and cash equivalents increased to RM90.9 million (2014: RM78.0 million). The group's adjusted finance service cover ratio (FSCR) declined to 1.56x in 2015 on the back of higher principal repayment, but within the covenanted level of 1.30x (2014: 2.75x).

In 2015, the holding company received RM10.0 million in dividends and RM17.2 million in interest income from its subsidiaries. The holding company's cash and cash equivalents stood at RM20.4 million after meeting the net IMTN principal repayment (RM35 million), IMTN profit payment (RM14.3 million) and financial guarantee fees (RM3.9 million). While Senari Synergy's cash flow would be able to meet its total debt obligations of RM44 million in 2017, MARC opines that the group is exposed to refinancing risk due to a significant principal repayment of RM220 million in August 2018.

Notwithstanding, the downside risks on Senari Synergy's credit profile are mitigated by the irrevocable and unconditional guarantee provided by Danajamin. Any changes in the supported rating or rating outlook will be primarily driven by changes in Danajamin's credit strength.

Contact: David Lee, +603-2082 2255/ david@marc.com.my