RAM Ratings has reaffirmed the AAA(s)/stable rating of Ihsan Sukuk Berhad’s RM1.0 billion Sukuk Ihsan Programme. Ihsan Sukuk, a funding conduit of Khazanah Nasional Berhad (the Company or Khazanah), had been incorporated to raise capital for the purpose of supporting its corporate social responsibility efforts.

Published on 06 October 2016

RAM Ratings has reaffirmed the AAA(s)/stable rating of Ihsan Sukuk Berhad’s RM1.0 billion Sukuk Ihsan Programme. Ihsan Sukuk, a funding conduit of Khazanah Nasional Berhad (the Company or Khazanah), had been incorporated to raise capital for the purpose of supporting its corporate social responsibility efforts. Notably, if the sustainable and responsible investment (SRI) project identified for the Sukuk Ihsan meets the targeted performance indicators, the nominal value (or accreted value, where applicable) of the Sukuk Ihsan will be reduced by a predetermined percentage. The first RM100.0 million issue of Sukuk Ihsan is based on the Islamic principle of Wakalah Bi Al-Istithmar; the proceeds had been used to purchase eligible sukuk investments. Khazanah had, in turn, used the proceeds to fund a Shariah-compliant eligible SRI project, i.e. Yayasan AMIR’s Trust Schools Programme.

The ratings reflect the credit strength of Khazanah, as the ultimate obligor servicing the profit and principal payments under this transaction. Although profitability and debt-coverage indicators have weakened, RAM continues to view Khazanah as an extension of the Government of Malaysia (GoM); we therefore equate the Company’s rating to that of the GoM. The reaffirmation of Khazanah’s rating also reflects its increasingly diversified investment portfolio and superior financial flexibility.

During the period under review, Khazanah’s investment portfolio in terms of realisable asset value (RAV) appreciated at a slower rate of 3.2% (fiscal 2014: 7.7%) to RM150.2 billion. In fiscal 2015, Khazanah’s dividend income ebbed to RM2.41 billion (fiscal 2014: RM5.18 billion), in the absence of special dividends from Valuecap and one-off divestment gains, in addition to lower contributions from its investee companies. Khazanah’s profitability, which saw its profit before tax halved y-o-y to RM0.5 billion, was also crimped by higher finance costs, foreign-exchange losses, and further investment write-offs. However, these were partially moderated by a stronger gain from divestments of RM2.45 billion (fiscal 2014: 0.52 billion).

Moving forward, Khazanah’s profitability and balance sheet may continue to be weighed down amid the still-challenging operating environment, which limits the upside potential of dividend receipts. Khazanah may also need to provide ongoing support for weaker subsidiaries or investee companies, as well as pay additional special dividends to the GoM (on account of persistently weak oil prices). That said, the Company’s portfolio remains fairly well diversified by sector and geographical exposure, which serves to mitigate economic headwinds. To enhance its portfolio returns, Khazanah has increasingly added exposure to innovation and technology investments. However, we opine that such start-ups and unlisted ventures are typically associated with lengthy gestation periods and higher risks. The Company will need to exercise financial discipline in maintaining divestment gains, in order to supplement its dividend receipts.

As at end-December 2015, Khazanah’s debt level rose to RM39.9 billion, pushing its gearing and net gearing ratios up to a respective 1.46 and 1.40 times (end-December 2014: 1.28 and 1.23 times). Coupled with its weaker profit performance and higher average cost of funding, its interest cover and OPBDIT debt cover thinned to a respective 2.44 and 0.11 times (fiscal 2014: 3.87 and 0.14 times). While the Company traditionally enjoys easy access to the debt capital market, the persistently volatile global financial landscape may render its funding options more uncertain and influence the valuation and timing of its divestments. Nevertheless, Khazanah’s portfolio has been able to consistently and substantially cover its liabilities; its RAV to liabilities ratio stood at 3.1 times as at end-December 2015 (end-December 2014: 3.7 times).

Analytical contact                                        Media contact
Daniel Wong, CFA                                         Padthma Subbiah
(603) 7628 1172                                            (603) 7628 1162
danielwong@ram.com.my                             padthma@ram.com.my