Published on 17 Jan 2020.
RAM Ratings has reaffirmed the respective AA1/Stable ratings of YTL Power International Berhad’s (YTL Power or the Group) RM5 bil MTN Programme (2011/2036) and RM2.5 bil Sukuk Murabahah Facility (2017/2027). The reaffirmation reflects our expectation that YTL Power’s credit metrics will remain intact, anchored by the resilient dividend-paying capacity of its utility businesses. YTL Power’s strong business profile is backed by its ability to derive stable and predictable earnings from its concession-based assets, both locally and overseas.
On the other hand, the ratings are moderated by multiple headwinds that may keep pressuring the Group’s earnings. YTL Power’s Wessex Water Services Limited (WWSL) in the UK – its key earnings contributor - will face earnings pressure following industry-wide regulatory tightening in April 2020. Elsewhere, excess generating capacity has been plaguing the Singaporean power market, causing YTL PowerSeraya Pte Ltd (PowerSeraya) to incur its first pre-tax loss in fiscal 2019. On the home front, the Group’s 1BestariNet project has not been renewed, thereby impacting earnings of the mobile broadband segment.
That said, the impact is somewhat tempered by steady contributions from YTL Power’s associates in the Indonesian power sector and the Australian power transmission industry. Furthermore, the commencement of its 554 MW (gross) oil-shale-fired power plant and an open cast oil shale mine in Jordan (under 45%-owned Attarat Power Company) will enhance the Group’s earnings diversity in the longer term.
Our analysis of YTL Power’s financial strength primarily focuses on company-level metrics, i.e. its ability to access the residual cashflow from its operating entities to service its company-level debts once they have discharged their own financing obligations. The debts raised for the financing of its concession-based assets, such as WWSL, PowerSeraya and PT Jawa Power, 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 of YTL Power’s intermediary and subsidiaries companies as at end-June 2019, which can be readily channelled to YTL Power when needed to service its company-level debts. Despite persistent challenges, its operating cashflow (OCF)-to-net debt coverage ratio came in at 0.78 times in fiscal 2019, outperforming our expectation of 0.45 times (fiscal 2018: 0.76 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 challenges, this said ratio is envisaged to come in at 0.35 times in fiscal 2020 and stay within our rating threshold of at least 0.20 times up to fiscal 2024. The erosion is mainly due to our assumption of the Group’s heftier net debt load to fund the equity investment in its Indonesian power project; its OCF is expected to stay flattish at RM600mil-RM700mil 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 YTLPI’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 (RNAV) of RM14.2 bil for its concession holdings. “The value of its regulated assets such as WWSL and ElectraNet Pty Ltd increases 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 its parent, YTL Corporation Berhad (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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Ratings on YTL Power International Berhad