Resolution of long-drawn-out water sector restructuring is positive, but no immediate impact on Gamuda

Published on 17 Aug 2018.

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RAM Ratings does not expect Syarikat Pengeluar Air Selangor Holdings Berhad’s (SPLASH Holdings) acceptance of the offer from Pengurusan Air Selangor Sdn Bhd (Air Selangor) to acquire its entire stake in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) for RM2.55 billion to have an immediate impact on the ratings of debt programmes under Gamuda Berhad (or the Group) (Table 1 below). SPLASH Holdings is a 40%-associate of Gamuda while Air Selangor is the entity identified by the Selangor State Government to take over water supply and distribution services in Selangor and the Federal Territories of Kuala Lumpur and Putrajaya.  

Moving forward, Gamuda will be losing its share of SPLASH’s profit of about RM100 million per year, which accounted for about 12% of the Group’s pre-tax profit in FY July 2017. Its cash flows, however, will not be adversely affected, given that SPLASH has not been paying dividends to the Group. Gamuda also stands to receive a sum of RM760 million upfront for its 40%-stake in SPLASH Holdings, with the remaining consideration of RM260 million to be spread over nine years. The initial payment will substantially boost the Group’s already-lofty cash coffer of RM1.41 billion as at end-April 2018. We understand that the proceeds will be used to fund Gamuda’s working capital and future projects.

The offer of RM2.55 billion is at a 28% discount to SPLASH’s net book value (NBV) of RM3.54 billion as at end-June 2018, which will lead to a RM1 billion loss at SPLASH Holdings (Gamuda’s share: RM400 million). The Group’s net gearing ratio (pre-FRS 11 ) after considering the upfront payment could improve to 0.47 times (end-April 2018: 0.55 times), depending on the utilisation of the said proceeds, although its gross gearing ratio (pre-FRS 11) is projected to marginally deteriorate to 0.84 times (end-April 2018: 0.80 times).

The resolution of the long-drawn-out negotiations on the disposal of SPLASH is viewed to be positive. While the offer is at a large discount to SPLASH’s NBV, the potential impairment is much lower than that of a previous offer, and is seen to be manageable especially if disposal proceeds are retained to fund its projects or pare down borrowings.    

After the acceptance of the offer, the parties involved are anticipated to commence negotiations on the terms and conditions for the sale and purchase of SPLASH. The sale and purchase agreement is envisaged to be finalised by 14 September 2018.

Table 1: Issue ratings of Gamuda and Bandar Serai Development Sdn Bhd * The ratings reflect an irrevocable and unconditional guarantee on the facilities extended by Gamuda.

 

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¹Pre-FRS 11 figures reflect the proportionate consolidation of Gamuda’s incorporated joint ventures.

 

Analytical contact
Karin Koh, CFA
(603) 7628 1174
karin@ram.com.my

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

 

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Published by RAM Rating Services Berhad
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