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RAM Ratings reaffirms Sabah Development’s AAA rating

Published on 30 Dec 2021.

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RAM Ratings has reaffirmed the AAA/Stable rating of Sabah Development Berhad’s (Sabah Development or the Group) Islamic Medium Term Notes Programme of up to RM10.0 bil. 

The rating mirrors Sabah’s State Implicit Strength as we expect the Group to continue to derive strong support and financial flexibility from the Sabah state government, if required. Our view is premised on the Group’s strategic and important role as the funding vehicle and investment arm of the state government. 

Wholly owned by the Sabah state government, the Group participates in major projects essential to the state’s development. As such, Sabah Development is considered a dependent entity under RAM’s Rating Methodology for Government-linked Entities. Since its establishment in 2015, the Group’s financial performance has been sustained by its banking operations under Sabah Development Bank Berhad (SDB, rated AA1/Stable/P1 by RAM). The Group’s wholly owned subsidiary Sabah International Petroleum Sdn Bhd – the state-owned vehicle in the upstream oil and gas sector – has been unprofitable because of hefty finance costs and depreciation charges. The Group’s concession-based water segment while generating stable earnings, contributes less than 10% of its top and bottom lines.

In FY Dec 2020, Sabah Development’s revenue fell 10.8% to RM719.8 mil owing to lower charter rates following the extension of the charter contract for floating production storage and offloading vessel, Ratu Nusantara, and a bulk water supply rate reduction. These factors, coupled with a higher allowance for impairment losses in the banking segment, led the Group’s operating profit before depreciation, interest and tax and pre-tax profit to plunge a respective 65.4% and 96.1% to RM73.2 mil and RM61.9 mil. In line with diminished earnings, the Group’s funds from operations (FFO) and operating cash flow (OCF) debt cover remained weak at below 0.1 times. After incorporating our analytical adjustments, Sabah Development’s gearing at the group level stood at 1.2 times as at end-December 2020, unchanged from the previous financial year.

We expect gearing to stay elevated, given projected higher debts. The Group intends to raise about RM1.6 bil next year to fund the acquisition of another 5% equity interest in Petronas LNG9 Sdn Bhd and refinance Sabah International Petroleum’s borrowings from SDB. Sabah International Petroleum was selected by the state government to take up national oil giant Petronas’ earlier offer of a 10% stake in Petronas LNG9 at a discounted price. Based on company-level figures, we expect Sabah Development’s gearing to come in at 1.5 times-2.0 times between 2022 and 2024, and its FFO and OCF debt cover to hover around 0.1 times during this period. 

The Group’s weak company-level interest coverage and liquidity also moderate the rating. Interest cover is anticipated to stay weak at around 1.5 times-1.8 times between 2022 and 2024. As at end-December 2020, cash reserves at the company level amounted to only RM7.8 mil. The tight liquidity is however mitigated by the Finance Service Reserve Account required under the transaction terms, which is pre-funded with six months of profit payments due and payable under the sukuk programme. We further highlight that RAM’s financial projections takes into consideration Sabah Development’s representation that sukuk issuance under the programme will be limited to RM3.0 bil initially. Any further drawdown will warrant a reassessment. As it would consolidate its financial accounts only by the year-end, RAM’s assessment is based only on its latest available financial data up to December 2020. 

 

Analytical contacts
Liew Kar Ling
(603) 3385 2586
karling@ram.com.my

Thong Mun Wai
(603) 3385 2522
munwai@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2021 by RAM Rating Services Berhad



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