Published on 14 Apr 2020.
RAM Ratings has reaffirmed the AA1/Stable rating of Sasaran Etika Sdn Bhd’s (SESB or the Company) RM220 million Fixed-Rate Serial Bonds (2012/2027). This reflects our expectation that SESB’s strong cashflow-generating aptitude and debt-servicing ability will be sustained by a steady inflow of Availability Charges (ACs). SESB holds a 221/2-year concession for the design, construction, completion and maintenance of residential colleges to accommodate 5,000 students of International Islamic University Malaysia (IIUM) in Kuantan, Pahang. The Company continues to maintain a sound operational track record with regard to its asset management services.
As at the last interest payment month of October 2019, SESB managed to record a debt service cover ratio (DSCR, with cash balances, post-distribution, calculated over a 12-month period in payment months) of 2.07 times – outperforming RAM’s expectation of 1.87 times. Under our analysis, the Company is anticipated to register respective minimum and average DSCRs of 1.50 times and 1.76 times throughout the remaining tenure of the Bonds, in line with the minimum 1.50 times required to maintain an AA1 rating. RAM’s projection incorporates a two-month delay in the receipt of ACs and optimisation of dividend payments throughout the tenure of the facility – including a RM7 mil distribution in 2020.
Under the concession agreement (CA) dated 25 October 2011 between the Company, IIUM and the Government of Malaysia (GoM), SESB stands to receive a predictable stream of monthly ACs in return for constructing the IIUM residential colleges, as well as monthly Asset Management Service Charges (AMSCs) for the maintenance of the facilities thereafter.
Timely receipt of ACs is crucial as these are the sole source of cashflow for debt repayment. On that note, ACs were received within an average of 34 days in 2019 – well within our stressed analysis. Counterparty risk faced by the Company is minimal as the GoM – via the Ministry of Higher Education – is the ultimate obligor of concession payments. That said, we remain cognisant of the possibility of delays in concession payments – which might stem from administrative hurdles – although payments have largely been received on schedule.
The level of complexity involved in asset management services for IIUM is viewed as low. Previously undertaken by Henry Butcher Malaysia Sdn Bhd, the maintenance contract for the facilities has been undertaken internally by SESB’s sister company – Nadi Cergas Urus Harta Sdn Bhd – since March 2019. The performance of maintenance services remains commendable, with only minor deductions charged for not meeting key performance indicators in 2019 – 0.06% of annual AMSCs.
While we view termination risk during the asset management services period as remote, the Company is entitled to compensation in the event that the CA is terminated by either IIUM or SESB. As with most concession-related companies, SESB is exposed to single-project risk in that a force majeure or major operational failure could disrupt its entire operation. We understand that SESB’s management services are running uninterrupted and have not been adversely impacted by the Covid-19 pandemic and the resultant Movement Control Order.
Davinder Kaur Gill
(603) 3385 2525
(603) 3385 2577
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Ratings on Sasaran Etika Sdn Bhd