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RAM Ratings affirms AAA(s)/Stable rating of Sarawak Petchem’s Sukuk Wakalah
Published on 19 Jun 2023.
RAM Ratings has affirmed the AAA(s)/Stable rating of Sarawak Petchem Sdn Bhd’s (the Company) RM6.0 bil Islamic Medium-Term Notes Programme (2022/2052) (Sukuk Wakalah).
The enhanced rating reflects an 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 mirrors the state of Sarawak’s (AAA state implicit strength) in view of the former’s important role in promoting the state’s economic, industrial and social developments.
Excluding the guarantee, Sarawak Petchem’s credit profile is reflective of its strong project fundamentals, backed by favourable arrangements with national oil company, Petroliam Nasional Berhad (Petronas). Petronas will be the supplier of natural gas for Sarawak Petchem’s methanol plant (the Plant), providing technical support and expertise and acting as the offtaker of the Company’s methanol products. The cost of natural gas – Sarawak Petchem’s main input – is tied to methanol prices net of freight charges under an agreement with Petronas. This offers the Company some protection against the volatile prices of methanol, a globally traded commodity. Another credit positive is Sarawak Petchem’s very close relationship with SEDC.
Considerable construction risk moderates the Company’s credit strength. The contractors have been given extensions for the completion of the plant (three months) and the jetty (70 days), necessitated by pandemic-related manpower shortages and procurement delays as well as cashflow issues amid marked raw material price increases. As of 24 February 2023, construction progress had caught up, with 86.55% of works completed against the planned 84.65%. The Plant is expected to commence operations in April 2024, in keeping with our assumption of mid-2024.
Sarawak Petchem’s highly leveraged balance sheet is also a moderating factor. With the bulk of funding for construction financed by debt, gearing will peak at about 3.5 times during the construction period before easing to a still-high 1.70 times-2.40 times in the five-year period after the completion of the Plant. On balance, operating cashflow debt coverage is projected to be in the teens 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 next five-year period. Sarawak Petchem’s minimum finance service cover ratio (post-distribution, with cash) will also be strong at 1.75 times in fiscal 2025.
Some portions of the contracts with the contractors are priced in foreign currencies, exposing 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.
Analytical contacts
Karin Koh, CFA
(603) 3385 2508
karin@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 2023 by RAM Rating Services Berhad
