Published on 09 Dec 2022.
RAM Ratings has reaffirmed the AAA/Stable rating of Sarawak Energy Berhad’s (SEB or the Group) RM15.0 bil Sukuk Musyarakah Programme (2011/2036).
The reaffirmation reflects our expectation that the Group’s business will remain resilient on the back of long-term take-or-pay power purchase agreements signed with bulk customers in the Sarawak Corridor of Renewable Energy (SCORE), albeit its highly concentrated exposure to a single offtaker. The rating also considers SEB’s very strong relationship with the Sarawak state government and the federal government.
SEB’s monopoly over the generation, transmission, distribution and retail of electricity in Sarawak highlights its critical role in making available and delivering electricity, as well as its importance as a key facilitator of the SCORE. Based on RAM’s rating methodology for government-linked entities, the Group is highly likely to receive extraordinary government support in the event of financial distress. SEB is wholly owned by the Sarawak government through the State Financial Secretary.
The Group delivered a strong financial performance in FY Dec 2021, maintaining its growth momentum in the first half of this year. Revenue increased 9.5% to RM6.05 bil in fiscal 2021, climbing another 13.9% y-o-y to RM3.30 bil in 1H fiscal 2022, in large part after the full commissioning of Press Metal Aluminium Berhad’s (Press Metal) Phase 3 smelter in October 2021. Consequently, SEB’s operating profit before depreciation, interest and tax rose a respective 5.0% and 12.6% y-o-y to RM3.09 bil and RM1.91 bil in these periods, although somewhat moderated by higher fuel costs incurred by the Group’s newly commissioned Tanjung Kidurong combined-cycle gas turbine plant. These factors lifted pre-tax profit to RM1.21 bil in FY Dec 2021 and RM1.07 bil in 1H FY Dec 2022 (FY Dec 2020: RM1.06 bil).
In line with stronger earnings, the Group’s funds from operations debt coverage (FFODC) and gearing improved to 0.22 times and 1.40 times, respectively, in 1H FY Dec 2022 (FY Dec 2020: 0.15 times and 1.95 times). SEB also concluded the terms of an agreement to export 30 MW-50 MW of energy to Sabah Electricity Sdn Bhd for a 15-year period from 2024. Negotiations to finalise terms for potential long-term energy supply to customers in the oil and gas as well as steel and metallic silicon manufacturing industries (totalling 220 MW) remain ongoing. The Group is also in talks with existing customers planning to expand and prospective customers amid growing interest in the SCORE.
In anticipation of greater energy demand and to ensure sufficient available capacity, SEB is deferring the phasing out of one of its aged coal-fired plants and intends to raise around RM5.30 bil of debt over the next three years (previously RM3.10 bil) to fund new plant-ups, transmission and distribution assets. While the amount earmarked is higher as some projects not yet committed to were deferred during the Covid-19 pandemic, we expect a gradual ramp-up in demand to support the additional borrowings. Based on RAM’s sensitised projections, the Group’s FFODC will be sustained at an average of 0.16 times between 2023 and 2025, while gearing could ease to 1.26 times with profits accumulated over time.
SEB’s business is structurally skewed towards contributions from SCORE customers, particularly Press Metal (rated AA3/Stable/P1 by RAM) and its subsidiary PMB Silicon Sdn Bhd. Nonetheless, we draw comfort from Press Metal’s commendable performance to date. Take-or-pay clauses under power purchase agreements signed with bulk customers give the Group some cashflow stability. SEB is also exposed to supply concentration risk as a result of its reliance on the Bakun hydroelectric plant. New plant-ups will help alleviate this risk.
Liew Kar Ling
(603) 3385 2586
Chong Van Nee, CFA
(603) 3385 2482
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