Published on 17 Oct 2017.
RAM Ratings has reaffirmed the enhanced AA1(s)/Stable rating of Pendidikan Industri YS Sdn Bhd’s (PIYSB or the Company) RM150 million Bai’ Bithaman Ajil Islamic Debt Securities (2008/2022) (BaIDS). The rating reflects our view that PIYSB’s debt-servicing ability in respect of the BaIDS remains substantially enhanced by the demonstrated and expected support of the Selangor State Government (SSG or the State). In February 2011, the Selangor State Executive Council approved a RM205.5 million allocation for all repayments on the BaIDS between 2012 and 2022. Pursuant to that, the State has been paying all the principal and profit payments due on behalf of PIYSB since January 2012, including those due in January 2018, which has been credited into the finance service and redemption account (FSRA).
The SSG’s intention of supporting PIYSB is detailed in a strongly worded Letter of Support (LoS). Although not an outright guarantee, the document states that the SSG will ensure – either through equity, loans, grants and/or other means – that PIYSB fully and promptly meets its financial obligations under the BaIDS throughout the tenure of the facility. PIYSB provides educational services via Universiti Selangor (Unisel), and is wholly owned by the State Government via Menteri Besar Selangor (Pemerbadanan) (MBI).
While the recent investigations by the Malaysian Anti-Corruption Commission on the alleged misappropriation of payments by MBI to Jana Niaga Sdn Bhd concerning Unisel led to negative publicity, it is unlikely to affect the rating of the BaIDS. That said, we will continue monitoring the relevant developments on this issue.
Independent of the LoS, PIYSB’s stand-alone credit profile is very weak. Plagued by a weak franchise and keen competition, Unisel’s average student population remains below its break-even level of 12,700 students. The university’s average student population stood at a respective 9,889 and 8,885 in 2016 and 1H 2017, despite efforts to increase the numbers. As such, PIYSB has not been able to generate sufficient cashflow to meet its current operational requirements and financial payments, given its low fees and hefty costs.
While there could be an uptick in student numbers given Unisel’s collaboration with the Association of International Accountants and an upcoming branch campus in Bangladesh, we do not expect the increase to be significant in the near to medium term. Without a substantial rise in revenue or cost reduction, PIYSB is envisaged to remain in the red and keep relying on financial assistance from the SSG.
PIYSB is no longer technically insolvent following the increase in its paid-up capital, from RM0.64 million to RM60.64 million, as well as the recognition of a RM127.65 million revaluation gain in FY Dec 2015. Nevertheless, the Company is highly leveraged. As at end-December 2016, its gearing ratio stood at 1.15 times, albeit an improvement over 1.50 times of a year earlier due to a lighter debt load. PIYSB held RM20.94 million of cash and bank balances against RM15.00 million of short-term debts as at end-June 2017. However, the Company’s liquidity position is expected to stay vulnerable as it relies on its timely requests for financial assistance and fund disbursements from the SSG.
PIYSB derives financial flexibility from the SSG, given its role in supporting the State’s private higher-education objectives. RAM’s recent interaction with senior officials of the State Government lends further support to our view that the State will continue extending financial assistance to PIYSB if needed.
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