Published on 18 Jul 2022.
RAM Ratings has assigned a final rating of AAA(s)/Stable to Sarawak Petchem Sdn Bhd’s (the Company) proposed RM6.0 bil Islamic Medium-Term Notes Programme (proposed Sukuk Wakalah). In doing so, we have reviewed all relevant transaction documents and find them to be in line with our expectations when the preliminary rating was assigned (published on 27 April 2022).
The enhanced rating reflects the irrevocable and unconditional guarantee provided by the Company’s shareholders, Permodalan Satok Berhad and Sarawak Economic Development Corporation (SEDC), on a joint and several basis. The credit strength of the strongest obligor, SEDC, anchors the rating. SEDC’s credit profile reflects that of Sarawak, whose state implicit strength is rated AAA. This is premised on SEDC’s important role in promoting economic, industrial and social developments in the state.
Excluding the guarantee, Sarawak Petchem’s credit profile considers its strong project fundamentals, backed by favourable arrangements with national oil company, Petroliam Nasional Berhad (Petronas). The supplier of natural gas for the Project, Petronas also provides technical support and expertise and will be the offtaker of the Company’s methanol products. The cost of Sarawak Petchem’s main input, natural gas, is tied to methanol prices net of freight charges under an agreement with Petronas, which offers the Company some protection against the volatile prices of methanol, a globally traded commodity.
We view Sarawak Petchem’s relationship with SEDC to be very close. Despite it having only a 30% stake in the Company, SEDC is heavily involved in its operations at board level. The joint and several guarantee provided by SEDC reinforces this link. Upon the Plant’s completion and commissioning, Sarawak Petchem is expected to be a key contributor to the earnings of SEDC and Permodalan Satok (investment arm of Yayasan Hartanah Bumiputera Sarawak), with which the Company likewise enjoys a close relationship.
Its stand-alone credit profile however, is moderated by the considerable construction risk exposure to the Company given the greenfield nature of the Project, exacerbated by pandemic-related disruptions. Some portions of the contracts with its contractors which is priced in foreign currencies exposes Sarawak Petchem to foreign exchange movement. The Company remains susceptible to methanol price volatility, notwithstanding the arrangement with Petronas, as well as risks associated with a single project and output.
Sarawak Petchem’s highly leveraged balance sheet is also seen to be a credit negative. With the bulk of funding for construction financed by debt, gearing will peak at over 4 times during the construction period due to negative retained earnings before easing to a still-high 1.70 times-3.10 times in the five-year period after the completion of the Plant. On balance, Sarawak Petchem’s operating cashflow debt cover is projected to be in the mid-teen levels in FY Dec 2025 – the Plant’s first full year of operations – before improving to a healthy 0.20 times-0.30 times in the subsequent five-year period. Our sensitised scenario which assumes, among other factors, a flat methanol price of USD315/MT (10-year historical average: ~USD390/MT), indicates strong minimum and average finance service cover ratios (post-distribution, with cash) of 1.45 times and 1.76 times, respectively, upon the Plant’s first full year of operations.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
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Ratings on Sarawak Petchem Sdn Bhd