Published on 17 Jan 2020.
RAM Ratings has reaffirmed the AA1/Stable ratings of YTL Corporation Berhad’s (YTL Corp or the Group) RM2 bil MTN Programme (2013/2038) and RM5 bil CP Programme and MTN Programme (2019/2044). The reaffirmation reflects our expectation that the Group’s credit metrics will remain intact, anchored by the resilient dividend-paying capacity of its operating entities. YTL Corp’s strong business profile is backed by its ability to derive relatively stable and diversified concession- and REIT-based earnings, both locally and overseas.
On the other hand, the ratings are moderated by multiple headwinds that may keep pressuring the Group’s earnings. YTL Corp’s utilities segment – its key earnings contributor – is challenged by the water and sewerage division’s imminent industry-wide regulatory tightening in April 2020, the competitive operating landscape of its Singaporean power generation business, and the non-renewal of the 1BestariNet contract under the Group’s mobile broadband division.
The impact is, however, somewhat mitigated by the Group’s ability to generate stable and predictable income from its REITs – which are geographically diversified across different countries. Following the recent acquisitions of Malayan Cement Berhad (previously known as Lafarge Malaysia Berhad) and Holcim Singapore Ltd, the Group’s cement arm – YTL Cement Berhad – has emerged as the largest domestic cement producer, making up an estimated 60% of Peninsular Malaysia’s cement manufacturing capacity. The augmented business under YTL Corp will continue benefiting from scale economies and operational synergies. Operating under a common umbrella will also help YTL Cement remain self-sufficient.
Our analysis of YTL Corp’s financial strength primarily focuses on company-level metrics, i.e. its ability to access the residual cashflows of its operating entities to service its company-level debt, once they have discharged their own financing obligations. The debts raised for the financing of its concession- and REIT-based assets are ring-fenced and have no recourse to the holding company.
The ratings also factor in the substantial RM8.75 bil of unencumbered cash balances under YTL Power International Berhad’s intermediary and subsidiaries companies as at end-June 2019. These can be readily channelled to the Group when needed to service its company-level debts. Despite persistent challenges, its combined operating cashflow (OCF)-to-net debt coverage ratio came in at 0.36 times in fiscal 2019, outperforming our expectation of 0.28 times (fiscal 2018: 0.39 times). This is attributable to its lower-than-expected net debt level owing to the deferment of investment outlays for the development of a 2 x 600 MW coal-fired power plant in Indonesia (Tanjung Jati power project). Meanwhile, YTLPI’s operating entities have maintained their strong dividend-paying capacities, as evidenced by their higher-than-anticipated dividend distributions.
In spite of myriad challenges, the Group’s OCF-to-net debt coverage ratio is envisaged to hover around 0.22-0.23 times through the next five years, i.e. within our rating threshold of at least 0.20 times. The erosion is mainly due to our assumption of the Group’s heavier net debt load to fund the equity investment in its Indonesian power project while its OCF is expected to stay flattish at RM800mil-RM900mil per annum.
“The projected ratio is very close to the rating threshold of 0.20 times. As such, the rating will experience downward pressure from any major acquisition or investment in new projects if these are not accompanied by an immediate uplift in earnings and dividend-paying capacity,” highlights Davinder Kaur Gill, RAM’s co-head of Infrastructure & Utilities Ratings.
While YTL Corp’s debt coverage is weaker than that of some of its AA1-rated peers, this is balanced by the Group’s robust financial flexibility, with an estimated realisable net asset value of RM13.5 bil for its concession holdings. “Regulated assets such as Wessex Water Services Limited and ElectraNet Pty Ltd will increase in value with time, unlike time-based concessions, the value of which diminish as the concession terms run down,” explains Davinder.
The credit profiles of YTL Power and YTL Corp are deemed very closely linked. Therefore, any deterioration in YTL Corp’s credit profile will exert a negative impact on YTL Power’s (and vice versa).
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Published by RAM Rating Services Berhad
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Ratings on YTL Corporation Berhad