Published on 17 Dec 2021.
RAM Ratings has reaffirmed the AA1/Stable/P1 corporate credit ratings of Edra Power Holdings Sdn Bhd (Edra Power or the Group). The reaffirmation is premised on Edra Power’s resilient concession-based power generating businesses, backed by long-term power purchase agreements (PPAs) with government-owned off-takers. Its operating entities maintained their commendable performance with minimal unplanned plant downtime and revenue deductions, underlining their robust dividend flows to Edra Power. The healthy dividend receipts anchor Edra Power’s robust debt-servicing aptitude, although there are some concerns surrounding its pace of concession replacements.
Edra Power is Malaysia’s second largest independent power producer group (accounting for 9% of the nation’s installed capacity by equity ownership), after Malakoff Corporation Berhad. With an aggregate equity capacity of 4.7 GW, the Group owns 11 operating power plants, mostly located in Malaysia. These plants have long operating track records, with some spanning 25 years. The Group is also developing South-East Asia’s biggest combined-cycle gas-turbine (CCGT) power plant – a 2.2 GW facility in Melaka (held by 100%-owned Edra Energy Sdn Bhd).
Sixty-one percent of Edra Power’s power plant assets are scheduled to be retired by 2024, along with the expiry of their respective PPAs. These will only be partially compensated by Edra Energy’s plant upon its expected completion in 2022 and potentially, a 660 MW greenfield CCGT project in Bangladesh (in which it has 88% of interests) subject to Edra Power’s internal approval and the issuance of award from the Government of Bangladesh. Inability to replenish its portfolio with new projects may exert downward pressure on Edra Power’s business profile, given its shrinking scale of operations which could diminish its cashflow visibility in the longer term.
While Edra Power is actively pursuing several new projects, large-scale ventures into unfamiliar and less regulated power markets may heighten its exposure to regulatory and collection risks. In addition, greenfield projects would also entail completion risks. Notably, the timely completion of Edra Energy’s plant has been hampered by the pandemic and teething issues during the testing and commissioning phase.
The retirement of three power plants since 2019 crimped the Group’s consolidated revenue by 25.8% to RM4.5 bil in FY Dec 2020. This, along with elevated expenses and goodwill impairments as well as softer other income caused its pre-tax profit to plunge to RM284.8 mil during the same period (FY Dec 2019: RM961.2 mil). Company-level profitability, however, improved on account of a larger dividend income to support a one-off huge dividend payout to its parent company. The management has guided that future dividend outflows should normalise to support Edra Power’s expansion.
RAM’s assessment of Edra Power’s credit profile places greater emphasis on its company-level credit metrics, given that the bulk of the Group’s debts (those under its operating entities) is project-financed, ring-fenced and has no recourse to the holding company. For Edra Power to grow its portfolio, we have assumed RM2.50 bil of equity outlay for new projects (totalling 2.6 GW), as guided by the management. The Group will need to tap its unencumbered cash reserves and raise another RM1.29 bil of debt to finance its equity requirements. Our cashflow also incorporates an assumed RM480 mil of liquidity support to be extended to Edra Energy pursuant to its irrevocable and unconditional letter of undertaking. Despite this, we expect its average gearing and operating cashflow to net debt coverage ratios in the next five years to stay superior at a respective 0.13 and 0.68 times.
Edra Power boasts a robust liquidity profile and balance sheet, with RM1.13 bil of unencumbered cash reserves as at end-July 2021. Most of this is parked under its intermediate holding companies and operating subsidiaries. Moreover, Edra Power has a total of RM250 mil undrawn revolving credit facility (including USD42 mil facility to be in place by end-December 2021) that can be used for general working capital purposes or to extend financial support to its subsidiaries.
Elsewhere, Edra Power’s investments in Egypt and Bangladesh are exposed to payment risks and potential regulatory changes. That said, the governments of these countries have been supportive thus far given the power sector’s crucial role in their economic development. Revenue collection by Edra Power’s subsidiaries in both countries has been forthcoming to date, albeit consistently delayed. We note, however, that the off-takers’ payment commitments are supported by guarantees from the Central Bank of Egypt and the government of Bangladesh.
Chu Jia Ying
(603) 3385 2519
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on Edra Power Holdings Sdn Bhd