MARC AFFIRMS ITS AAAID RATING ON GAS DISTRICT COOLING (PUTRAJAYA) SDN BHD’S RM300 MILLION ISLAMIC DEBT SECURITIES

MARC AFFIRMS ITS AAA_ID RATING ON GAS DISTRICT COOLING (PUTRAJAYA) SDN BHD’S RM300 MILLION ISLAMIC DEBT SECURITIES

MARC has affirmed its AAA_ID 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 GDC Putrajaya’s position as the sole supplier of chilled water in Putrajaya under long-term offtake agreements that provide demand charges regardless of offtake volumes. The major offtakers are the federal government and Putrajaya Holdings Berhad (PJH). The rating also incorporates the strong credit strength of its parent PJH and ultimate holding company Petroliam Nasional Berhad (PETRONAS) on which MARC maintains a long-term credit rating of AAA/Stable and a public information rating of AAA/Stable respectively.

GDC Putrajaya supplies chilled water through six wholly-owned gas district cooling plants to the federal government, PJH and third parties, which consume 88.3%, 7.5% and 4.2% of its supplies respectively as at end-2014. In return, the company receives payments from the offtakers in two forms: demand and variable charges. The demand charges are payable irrespective of offtake volumes while the variable charges are based on the actual quantity of chilled water delivered. MARC regards the demand charges as mitigating demand risk, providing GDC Putrajaya with a steady revenue stream. The variable charges, which currently account for 30% of the company’s revenue, are expected to increase in tandem with the increase of government and commercial buildings in Putrajaya.

MARC notes that the government has been exempted from the take-or-pay condition; PJH and third parties will be charged for any shortfall below the contractual demand under their respective offtake agreements. The exemption from the take-or-pay condition was given following the pass-through of utility costs and a hike in demand charges of 9.0% in January 2014. While GDC Putrajaya is negotiating with the government on tariff restructuring, MARC does not view the exemption as material to GDC Putrajaya’s cash flows. In 1H2015, the overall demand for chilled water increased to 87.2 million refrigeration tonnage hours (RTh) (1H2014: 86.6 million RTh) after adding another 700 RT of contractual demand, which is expected to increase further in 2H2015 with the inclusion of four new commercial and government buildings. In view of the anticipated increase in demand for chilled water from new offtakers against limited upside to the capacities of Plant 1 and Plant 2, GDC Putrajaya plans to invest RM110.5 million over the next two years to expand the capacities of its key plants by 10,000 RT.

For 1H2015, sales increased marginally by 3.6% year-on-year (y-o-y) to RM88.7 million while operating costs rose by 5.9% y-o-y to RM73.1 million, resulting in lower operating profit margin of 17.3% (1H2014: 19.0%). MARC is of the view that the absence of the fuel cost pass-through mechanism would impact GDC Putrajaya’s profit margin going forward following the implementation of a 10% gas tariff hike starting July 1, 2015. MARC believes GDC Putrajaya would be incentivised to enter into new negotiations on chilled water tariffs as well as improve its operating efficiency and implement cost measures to offset margin erosion.

GDC Putrajaya’s cash flow from operations (CFO) declined to RM8.6 million in 1H2015, due to a sizeable increase in trade receivables to RM47.2 million (1H2014: RM38.1 million). Notwithstanding this, GDC Putrajaya’s financial metrics continue to be supported by its strong operating profit before interest, tax, depreciation and amortization (OPBITDA) interest coverage which improved to 8.65 times in 1H2015 (2014: 6.62 times). In addition, the company has sufficient liquidity buffer of RM57.4 million as at end-2015 to cover the interest payment of RM6.9 million in 2016. GDC Putrajaya will need to maintain its cash reserves in anticipation of the company’s RM110.5 million plant expansion plans and the next principal redemption of RM50.0 million in 2017.

The stable outlook is underpinned by MARC’s expectation that the immediate and/or ultimate parent companies PJH and/or PETRONAS will continue to offer GDC Putrajaya financial support in relation to the BaIDS debt obligations. A material change in the support assumption will result in a revision of GDC Putrajaya’s rating.

  

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

January 21, 2016