Published on 18 Aug 2021.
RAM Ratings has reaffirmed the AA3/Stable rating of Tadau Energy Sdn Bhd’s (Tadau or the Company) RM250 mil SRI Sukuk Programme (2017/2033). The rating reflects the robust operational performance of Tadau’s 50 MWac solar photovoltaic (PV) plants (the Plants) in Kudat, Sabah. Comprising Unit 1 (2MWac) and Unit 2 (48MWac), the Plants supply electricity to Sabah Electricity Sdn Bhd (SESB) via two power purchase agreements (PPAs). They generate robust and stable cashflow, which supports the Company’s debt-servicing aptitude.
In 2020, Tadau’s net electrical output surpassed RAM’s sensitised projection and the forecast provided to SESB at the start of each year (termed the “declared annual quantity” or DAQ) by 22.8% and 18.0%, respectively. The PPAs only require the Plants to meet 70% of their DAQ. The Plants have not been subject to any unexpected downtime in the past year. Tadau has also been receiving prompt payments from SESB. Barring any major unforeseen outages, RAM expects the Plants to maintain their healthy operational performance going forward.
Against its stronger energy output and financial performance in FY Jun 2020, a seasonally lower solar irradiance in January–March 2021 reduced the Plants’ energy output, consequently affecting its financials in 9M FY Jun 2021. Coupled with lower income from its permitted investments, this pushed its net profit down to RM2.45 mil (9M FY Jun 2020: RM6.46 mil). Even so, Tadau’s cashflow will still be within our stressed scenario, with an expected funds from operations of about RM27 mil in FY Jun 2021.
Looking ahead, we anticipate Tadau’s cash-generating aptitude and debt-protection metrics to remain strong, with respective minimum and average annual finance service coverage ratios (or FSCRs) of 1.50 and 3.10 times (with cash balances) throughout the Sukuk’s tenure. Our sensitised cashflow analysis assumes lower energy output due to unforeseen outages, along with lower established capacity, plant efficiency and energy rates. In determining the amount of dividends paid by Tadau, we expect the Company to be mindful of its longer-term cashflow profile apart from meeting this covenant at the point before distribution. Excessive distributions (albeit not breaching its covenants) in the early years could compromise Tadau’s debt service coverage later on.
As with other solar projects, Tadau’s PPAs with SESB require the latter to accept and purchase energy generated by the Plants, up to a specified limit. This moderates the absence of fixed availability-based revenue earned by thermal plants. In contrast to thermal plants, the lack of moving parts and combustion functions further simplifies the operation and maintenance (O&M) of Tadau’s PV plants.
Tadau is, however, exposed to solar irradiance variability and plant performance risks. While the Plants’ energy output has mostly exceeded our expectations since their Commercial Operations Date, diligent O&M remains key to ensuring their satisfactory long-term performance. The Company is also exposed to single-project and regulatory risks, despite the Government’s supportive stance on renewable energy projects.
Aw Wei Xuan
(603) 3385 2506
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on Tadau Energy Sdn Bhd