Published on 01 Jun 2023.
RAM Ratings has affirmed the AA1/Stable rating of Encorp Systembilt Sdn Bhd’s (Encorp or the Company) RM1.575 bil Sukuk Murabahah. The Company’s debt servicing ability is expected to remain robust, safeguarded by the steady inflow of monthly concession payments, the transaction structure and restrictive covenants. The contractual cash inflows Encorp receives from the government, pursuant to its development of 10,000 units of teachers’ quarters throughout Malaysia (completed in 2004), are also free of performance-related deductions.
The Company’s finance service coverage ratio (FSCR, with cash balances, calculated over a 12-month period) on the latest sukuk principal repayment month of May 2023 was 1.70 times, outperforming the 1.50 times required for an AA1 rating, thanks to the timely receipt of monthly payments. While the Company’s cashflow is susceptible to concession payment delays, monthly receipts came in within a 25-day average in FY Dec 2022. Encorp faces minimal counterparty risk, given that the government is the ultimate paymaster.
Moving forward, we expect Encorp to register minimum and average FSCRs of above 1.50 times throughout the Sukuk’s tenure (management’s base case: 1.88 times and 1.94 times, respectively). Our analysis assumes Encorp will pay RM700,000 of administrative expenses per annum, with any remaining costs to be undertaken by Encorp Berhad (its ultimate parent company), as seen over the past two years.
As the last tranche of the Sukuk matures three months after the concession expires in February 2028, the short intervening period leaves no headroom for refinancing or restructuring, should the need arise. Based on our stressed projections, Encorp’s cash balances after the final principal repayment should provide a buffer of approximately seven months’ contractual payments.
The risk of a termination of the concession is deemed remote. If a default by the Company results in termination, the sukukholders’ position is protected under the transaction. However in the case of a default on the part of the government, the timing and quantum of compensation is uncertain.
Seri Nuralya Munawir
(603) 3385 2484
Davinder Kaur Gill
(603) 3385 2525
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Ratings on Encorp Systembilt Sdn Bhd