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.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522
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Ratings on Sarawak Petchem Sdn Bhd