Published on 22 Mar 2023.
RAM Ratings has reaffirmed the AAA/Stable rating of Sabah Development Berhad’s (the Group) Islamic Medium-Term Notes Programme of up to RM10.0 bil.
The rating mirrors Sabah’s AAA/Stable 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 role as the funding vehicle and investment arm of the state government.
Wholly owned by the Sabah government, the Group participates in major projects essential to the state’s development. As such, we consider Sabah Development 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). Other key businesses contribution has been negative, or minimal. The Group’s wholly owned subsidiary in the upstream oil and gas sector, Sabah International Petroleum Sdn Bhd (SIP) has been unprofitable because of hefty finance costs and depreciation charges. While Sabah Development’s concession-based water segment generates stable earnings, it contributes less than 10% of the Group’s top and bottom lines.
Having slipped into the red in FY Dec 2021, Sabah Development’s performance is anticipated to improve in fiscal 2022, supported by a larger share of profit from its associate Petronas LNG9 Sdn Bhd. Revenue fell 12.4% to RM630.3 mil in FY Dec 2021 owing to the full-year impact of lower charter rates following the extension of the charter contract for floating production storage and offloading (FPSO) vessel, Ratu Nusantara, in May 2020, and reduced interest income at SDB. These factors, coupled with higher operating expenses at SIP, resulted in an operating loss before depreciation, interest and tax of RM21.9 mil (FY Dec 2020: RM73.2 mil operating profit before depreciation, interest and tax).
Notwithstanding a lower finance cost, the Group recorded a pre-tax loss of RM87.7 mil in FY Dec 2021, in contrast to a pre-tax profit of RM61.9 mil the previous year. Consequently, its funds from operations (FFO) and operating cash flow (OCF) debt coverage stayed weak at below 0.1 times. Incorporating our analytical adjustments, Sabah Development’s gearing at the group level edged up to 1.3 times as at end-December 2021 (end-December 2020: 1.2 times).
In May 2022, SIP completed the acquisition of another 5% equity interest in Petronas LNG9, which is likely to start paying dividends next year. Except to refinance SIP’s borrowings from SDB, the Group has no plans to raise additional debt pending better visibility on other potential investments. Based on company-level figures, we expect Sabah Development’s gearing to stay between 1.0 times and 1.5 times from 2023 and 2025, while FFO and OCF debt coverage will hover around 0.1 times.
Company-level interest coverage and liquidity are weak and should improve once Petronas LNG9 starts paying dividends, subject to its performance. As at end-December 2021, cash reserves at the company level amounted to only RM8.6 mil. The tight liquidity is mitigated by the Finance Service Reserve Account required by the transaction terms, which is pre-funded with six months’ profit payments due and payable under the sukuk programme. We highlight that our financial projections take 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 of the rating. As the Group only consolidates its financial accounts at year-end, our assessment is limited to financial statements up to December 2021.
Liew Kar Ling
(603) 3385 2586
Thong Mun Wai
(603) 3385 2522
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