Published on 28 Sep 2018.
RAM Ratings has reaffirmed the AA2/Stable rating of Widad Capital Sdn Bhd's (the Company) Sukuk Murabahah Programme of up to RM110.0 million in Nominal Value. This is premised on our expectation that the Company's stable cashflow and robust debt-servicing ability will remain underpinned by predictable monthly contractual payments, pursuant to its facilities maintenance contract with the Public Works Department (PWD) to maintain the National Palace (the Contract).
Widad Capital is entitled to monthly payments from the PWD according to a schedule under the Contract. However, these monthly receipts are conditional on the performance of the maintenance work, with a portion being the provisional maintenance work, which is less certain in terms of timing and value. Under RAM's stressed scenario, Widad Capital is projected to register respective minimum and average finance service cover ratios (with cash balances, calculated over a 12-month period in payment months) of 1.93 and 2.35 times through the remaining tenure of the Sukuk. These are despite our assumption of an 80% reduction on the remaining provisional sum (as at end-May 2018, about 23% of the initial contracted value of RM68.11 million had been realised).
Widad Builders Sdn Bhd is the sub-contractor appointed by the Company to undertake the facilities maintenance work; the former has a reputable operating track record, having 3 years of experience in maintaining the palace prior to the current contract. Deductions on the monthly receipts will be effected on poor workmanship and this will be borne by Widad Builders. For the past year, the work performed has been satisfactory as the deduction imposed has remained minimal at an average of 1.9% of monthly work done. Having the Government of Malaysia – via the PWD – as the ultimate obligor of contractual payments to the Company minimises the latter's counterparty risk. The Sukuk holders are further protected by the tight structure and restrictive covenants of the transaction, notably the prohibition of dividend payments during the Sukuk's tenure.
Despite the abovementioned strengths, we remain cognisant of the transaction's moderately aggressive financing structure, particularly the advancement of a substantial 78% of the RM110 million of proceeds from the Sukuk to Widad Capital's shareholder, mainly for working-capital purposes. Moreover, the Company is sensitive to delays in the timing of contractual payments. On this front, we note that payments have been mostly prompt since the commencement of the Contract (i.e. July 2015). The Company is also exposed to the risk of termination of the Contract should it fail to carry out its agreed obligations and remedy any breach within the stipulated timeline, even though the risk is low.
Widad Capital is a wholly owned subsidiary of Widad Builders which is a wholly owned subsidiary of Bursa-listed Ideal Jacobs (Malaysia) Corporation Bhd, controlled by Tan Sri Muhammad Ikmal via his stakes in Widad Business Group. The latter has been awarded the Contract for the management, operation and maintenance of the National Palace on Jalan Tuanku Abdul Halim, Kuala Lumpur (formerly Jalan Duta), for 7 years effective July 2015. The Contract was novated to Widad Capital on 25 July 2016, with Widad Builders appointed as the sub-contractor to undertake facilities maintenance work.
Yip Chee Meng
(603) 7628 1187
(603) 7628 1162