FW: RAM Ratings reaffirms AA1 rating of Sarawak Energy's sukuk

 

Published on 29 Sep 2017.

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 generation, transmission and distribution (T&D) 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 the robust growth of SEB’s electricity sales (46.9% in 2016 and 17.7% y-o-y in 1H 2017), mainly contributed by the full commissioning of Press Metal Berhad’s new facility (Phase 3) in June 2016 and the full recovery of the latter’s Phase 2 plant from a fire incident in May 2015, as well as increased export sales to PT Perusahaan Listrik Negara and higher energy demand from other bulk customers. Additional cash inflows derived from the gradual commissioning of key SCORE customers are envisaged to support the Group’s growing debt load to expand its generating capacity.

RAM has also considered the impact of SEB’s acquisition of the entire equity interest in Sarawak Hidro Sdn Bhd, which in turn owns the Bakun hydroelectricity plant, which was completed on 16 August 2017. From a consolidated perspective, we expect the Group’s ownership of the plant to result in savings in operating cost and synergistic benefits to the Group over the longer term.

In line with hefty capex for new generating capacity and T&D assets, SEB’s debt level stayed high at RM9.92 billion as at end-June 2017 (end-June 2016: RM9.91 billion). However, adjusted gearing had eased to 2.63 times (end-June 2016: 2.87 times) due to increased accumulated earnings while adjusted funds from operations debt coverage (FFODC) remained low at 0.10 times in fiscal 2016, albeit improved from 0.08 times the previous year. Progressive ramping up of demand from bulk customers is anticipated to keep the Group’s FFODC within expectations, averaging 0.13 times between 2017 and 2021, while gearing is projected to taper from a high 2.56 times as at end-2017 to 1.75 times as at end-2021.

SEB continues to face demand risk, given that progressive take-up by SCORE customers is dependent on the completion of their facilities and their financial viability. It is also exposed to customer-concentration risk as SCORE off-takers create lumpiness in demand growth. Press Metal’s facilities in Sarawak accounted for 47% of SEB’s total energy sales (or 36% in ringgit terms) in 1H 2017. The Group is susceptible to power-supply concentration risk as 52% of the state’s installed capacity emanates from the 2,400-MW Bakun hydropower plant, although such reliance has been moderated since the completion of the 944-MW Murum hydropower plant in June 2015. The ownership of the Bakun plant allows SEB full access and control over its operations, providing more certainty over the security of electricity supply from the plant. The Group’s plant-ups over the next decade are expected to further reduce supply concentration risk.

 

Analytical contact
Chin Wynn, CFA
(603) 7628 1170
chinwynn@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my