RAM Ratings has reaffirmed the AA1/Stable rating of Sarawak Energy Berhad’s (SEB or the Group) RM15 billion Sukuk Musyarakah Programme (2011/2036). The reaffirmation is premised on the strong support that SEB continues to enjoy

Published on 26 August 2016

RAM Ratings has reaffirmed the AA1/Stable rating of Sarawak Energy Berhad’s (SEB or the Group) RM15 billion Sukuk Musyarakah Programme (2011/2036). The reaffirmation is premised on the strong support that SEB continues to enjoy from the Sarawak state government and federal government, given its monopoly over the transmission and distribution of electricity in the state, and hence its pivotal role in the Sarawak Corridor of Renewable Energy (SCORE). The Group, in our view, benefits from a “very high” likelihood of extraordinary governmental support in the event of financial distress, based on our rating methodology for government-linked entities.

The rating also takes into account continued growth in electricity sales, backed by the commissioning of new plants of SEB’s key customers in the SCORE. Despite a slower pace in take-up by several SCORE customers, SEB’s main customer, Press Metal Berhad, has contributed to the Group’s robust energy sales growth – in line with our expectations. This, along with cheaper hydropower generation, led to SEB comfortably meeting credit metrics anticipated by RAM despite additional borrowings over the past year.

SEB’s large capex programme had resulted in its debt level ascending to RM9.91 billion as at end-June 2016 (end-2014: RM7.50 billion). The Group’s adjusted gearing ratio remained high at 2.87 times as at the same date, albeit improved from 2.96 times as at end-2014 due to increased accumulated earnings. Adjusted funds from operations debt coverage stayed low at 0.08 times in FY Dec 2015. While SEB will have to gear up over the next decade as it embarks on plans to increase its generating capacity under the next phase of the SCORE (SCORE Phase 2), increased borrowings are expected to be supported by additional cash inflows as committed SCORE customers progressively commission and ramp up demand.

SEB remains exposed to demand risk, given that the progressive take-up of SCORE customers is dependent on the completion of their facilities and their financial viability. Available power for the first phase of the SCORE has been fully allocated and committed, with a targeted reserve margin of around 20%. SEB also faces customer-concentration risk as SCORE off-takers create lumpiness in demand growth – Press Metal Berhad’s facilities in Sarawak accounted for close to half of the Group’s total energy sales volume (or 37% in ringgit terms) in 1H 2016.

Elsewhere, the Group is exposed to power-supply concentration risk as about half of Sarawak’s existing power supply emanates from the 2,400-MW Bakun hydropower plant, which is owned by the federal government (via Sarawak Hidro Sdn Bhd). Any major interruption in power supply could undermine the state’s system security and pose a challenge to SEB in negotiations with potential SCORE customers. Reliance on the Bakun plant has been moderated since the completion of the 944-MW Murum hydropower plant in June 2015. The Group’s plant ups under SCORE Phase 2 would further reduce supply-concentration risk.

Analytical contact                                            Media contact
Chin Wynn, CFA                                                Padthma Subbiah
(603) 7628 1170                                                (603) 7628 1162
chinwynn@ram.com.my                                    padthma@ram.com.my