Published on 30 Nov 2020.
RAM Ratings has reaffirmed the AAA/Stable rating of Sarawak Energy Berhad’s (SEB or the Group) RM15 bil Sukuk Musyarakah Programme (2011/2036). The reaffirmation reflects our expectation that the credit metrics of the Group will remain resilient in the medium term, supported by its solid business fundamentals amid the progressively maturing Sarawak Corridor of Renewable Energy (SCORE). The rating also considers the sturdy support SEB enjoys from both the Sarawak state government (the State) and the Federal Government.
SEB’s monopoly over the generation, transmission, distribution and retail of electricity in Sarawak highlights its strategic role in making available and delivering electricity to power the state, and as a key facilitator of the SCORE. Based on RAM’s rating methodology for government-linked entities, the Group benefits from a very high likelihood of extraordinary government support in the event of any financial distress. SEB is wholly owned by the Sarawak state government through the State Financial Secretary.
The operations of SEB and its bulk customers were mostly intact during the Covid-19 Movement Control Order (or MCO) between 18 March and 11 May 2020, even though most economic activities in Sarawak were temporarily halted. That said, the pandemic did affect SEB’s performance. In 1H FY Dec 2020, the Group’s revenue fell 4.2% y-o-y to RM2.68 bil on weaker electricity sales to industrial and commercial customers, as well as lower uptake by customers within the SCORE. Softer demand from SCORE customers reflected the contracted take-or-pay amount, as they had purchased more than the contracted quantity in the previous corresponding period. The revenue drop and higher tariff for taking or impounding of raw water for generation of electricity effective 1 January 2020 pushed the Group’s OPBDIT down 14.2% to RM1.60 bil while its OPBDIT margin thinned to 59.7% (FY Dec 2019: 64.7%).
Nonetheless, the Group’s performance is anticipated to improve, backed by stronger demand from Press Metal Aluminium Holdings Berhad (rated AA3/Stable/P1 by RAM) and Malaysian Phosphate Additives (MPA), plus the implementation of SEB’s Cash Conservation & Management Office (CCMO) strategy. Press Metal’s Phase 3 smelter (Bintulu Phase 3) is scheduled for commissioning next year. MPA had started drawing power in June 2020 as its plant began operations.
Implemented in response to the Covid-19 crisis, the CCMO strategy aims to conserve SEB’s cashflow and builds liquidity buffers. It entails the deferment of non-essential capital and operating expenditure, expediting collections from receivables, securing additional credit lines and earlier issuance of debt securities to build cash reserves and lock in competitive profit rates. In 1H FY Dec 2020, drawdowns on the Sukuk had weakened SEB’s FFODC and gearing ratios to a respective 0.15 and 2.02 times. That said, they are still better than the Group’s five-year averages for fiscal 2014-2018 (FFODC: 0.11 times; gearing ratio: 2.68 times). SEB’s credit metrics are envisaged to progressively improve, supported by the ramping up of electricity demand from bulk customers. Backed by strong operating cashflow and healthy liquidity profile, the Group’s gearing ratio is expected to ease to an average of 1.57 times between fiscal 2021 and 2023, with its FFODC ratio hovering around 0.14-0.17 times.
Liew Kar Ling
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Ratings on Sarawak Energy Berhad