Published on 05 Dec 2019.
RAM Ratings has reaffirmed the AA1/Stable/P1 corporate credit ratings of Edra Power Holdings Sdn Bhd (EPH or the Group). The reaffirmation is premised on the resilience of EPH’s concession-based power generation businesses, backed by long-term power purchase agreements (PPAs) with government-owned off-takers. Sturdy revenue from the Group’s operating entities complements its healthy dividend income. This, coupled with a lightly geared company-level balance sheet, underpins EPH’s robust debt-servicing capability.
The Group has a stable of 13 power plants, with an aggregate equity capacity of 5.5 GW. Its assets are predominantly located in Malaysia, accounting for 56% of the Group’s total equity capacity or 10% of the nation’s installed capacity. This makes EPH the second largest independent power producer group in Malaysia (by equity capacity), after Malakoff Corporation Berhad. The Group is also developing another power project – a 2,242 MW combined-cycle gas-turbine (CCGT) power plant in Alor Gajah, Melaka. This will be the biggest gas-fired power plant in Malaysia upon completion in 2021. EPH’s foreign investments operate in regulated and concession-based environments in Egypt and Bangladesh, with a small presence in the UAE and Pakistan. They have generally been performing strongly to date, with 11- to 25-year operating track records.
RAM’s assessment of EPH’s credit profile places greater emphasis on its company-level credit metrics, given that the bulk of its debts (those under its operating entities) are project-financed, ring-fenced and have no recourse to the holding company. The risk of distribution disruption is deemed low, underpinned by steady revenue from its operating entities, which largely comprises availability-based payments that bear minimal demand risk. EPH’s investments are exposed to potential regulatory changes as the power sector is a heavily regulated industry, although we note that the respective governments of its foreign operations have been supportive given the sector’s crucial roles in those countries’ economic development. The Group has not experienced any major regulatory upheaval in these markets to date.
Most of the Group’s power plants are nearing the end of their PPAs; revenue replenishment is thus vital towards ensuring uninterrupted earnings. EPH is seeking to expand its capacity and maintain its plan to double its capacity from the current 5.5 GW to 11 GW over the next five years. Thus far, the additional capacity will be partially met by its 2.24 GW CCGT power plant in Melaka, which is expected to come on-stream in 2021. As with any new project, the Group may be exposed to significant construction and execution risks and will need to raise funds to finance its equity portion. Despite its ambitious plans, we derive comfort from the Group’s prudent risk appetite, as evident from its portfolio of low-risk projects since its establishment in 2016. EPH emphasises stable markets (with firm and long-term PPAs as well as government-backed single-buyer structures) that provide steady and predictable returns on its investment considerations. We derive further comfort from the Group’s strong operating track record that is supported by its extensive technical know-how.
A portion of EPH’s income is sourced from the Group’s foreign operating entities (22% of its consolidated revenue in fiscal 2018). As such, delays in payments from their off-takers will introduce cashflow volatility to the Group’s earnings and may affect the ability of EPH’s subsidiaries to channel dividends to the holding company. Despite delayed payments by the off-takers of its foreign investee companies, we derive comfort from the payment track records of these counterparties to date, along with the guarantees extended by the Central Bank of Egypt and the government of Bangladesh vis-à-vis the off-takers’ payment obligations.
Notably, EPH boasts a strong liquidity profile and balance sheet. This is further supported by a well-spread-out debt-maturity profile amid long-tenured project-financing debts. The Group held a hefty RM2.0 bil of unencumbered cash reserves as at end-July 2019, most of which resided at the level of its operating subsidiaries and intermediate holding companies and can be readily directed back to EPH, if required.
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Ratings on Edra Power Holdings Sdn Bhd