Published on 06 Aug 2020.
RAM Ratings has upgraded the rating of Widad Capital Sdn Bhd’s (the Company) Sukuk Murabahah Programme of up to RM110.0 mil in Nominal Value (the Sukuk), to AA1 from AA2. Concurrently, the rating outlook has been revised from positive to stable. This is premised on the Company’s strong debt-servicing ability and healthy operating performance, underpinned by timely monthly contractual payments from the Public Works Department (PWD) under the facilities maintenance contract for the National Palace (the Contract). The upgrade is further supported by the Company commendable operating track record in delivering its services under the Contract over the past four years.
The Company has appointed its parent company, Widad Builders Sdn Bhd (WBSB) as the sub-contractor, to undertake the facilities maintenance work at the National Palace. WBSB has an established track record in maintaining the National Palace through the last seven years, including three years’ similar experience prior to the present contract. Under the sub-contract, WBSB is paid a fixed percentage of Widad Capital’s revenue, thus shielding the Company from thinning margins and variation in costs.
WBSB has been performing commendably, with performance-linked deductions declining to an average of 1.1% of monthly work done in 2019 (2018: 2.0%). Such penalties are borne entirely by WBSB, as stipulated under the sub-contract. The better showing last year is attributable to WBSB’ efficiency in resolving complaints (known as work orders under the Contract) by the National Palace and the PWD within the stipulated time frame.
Widad Capital’s finance service coverage ratios (FSCRs) (with cash balances) came up to a respective 2.38 and 3.06 times in September 2019 and March 2020, relative to RAM’s projected 2.59 and 2.50 times. The lower FSCR in September 2019 had arisen from a review of the Company’s tax computation, which had in turn led to a weaker pre-financing cashflow in fiscal 2019. Despite the higher tax payment in 2019 and additional estimated tax throughout the remaining tenure of the Sukuk, the Company’s projected FSCRs are expected to remain strong. Furthermore, the sukukholders are protected by the transaction’s tight structure and restrictive covenants, especially the prohibition of dividend payments. As at end-March 2020, the Company’s cash reserves including deposits stood at a sizeable RM50.5 mil to support the RM70.0 mil in outstanding Sukuk.
Despite the abovementioned strengths, the Company is vulnerable to delays in contractual payments. That said, these payments have been promptly received since the commencement of the Contract in July 2015. Having the Government of Malaysia (GoM) – via the PWD – as the ultimate obligor of contractual payments minimises the Company’s counterparty risk. All said, the Company is still exposed to the risk of termination of the Contract if it fails to fulfil its obligations and/or remedy any breach within the stipulated time frame. In the event of a termination, the sukukholders will not be compensated by the GoM.
Widad Capital is a wholly owned subsidiary of Widad Builders Sdn Bhd. The latter is in turn fully held by Bursa Malaysia-listed Widad Group Berhad (formerly known as Ideal Jacobs (Malaysia) Corporation Bhd).
Irfan Afifah Mohd Zaki
(603) 3385 2551
(603) 3385 2577
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Published by RAM Rating Services Berhad
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Ratings on Widad Capital Sdn Bhd