RAM Ratings assigns AAA rating to Sabah state’s SMJ sukuk

Published on 22 Aug 2023.

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RAM Ratings has assigned a AAA rating to SMJ Sdn Bhd’s (SMJ or the Company) proposed Multi-Currency Islamic Medium-Term Notes (Sukuk Wakalah) Programme of up to RM10.0 billion. The rating has a stable outlook. SMJ was established as the state-owned oil and gas company pursuant to the Commercial Collaboration Agreement (CCA) between Sabah state government and Petroliam Nasional Berhad (PETRONAS). SMJ is wholly owned by the Sabah state government through Chief Minister Incorporated.

SMJ’s rating has been equated to Sabah’s state implicit strength; we view the Company to be highly strategic to the state government as the vehicle to champion the state’s oil and gas resources, a significant sector for the State both in financial and political terms. The Company is the designated entity responsible for overseeing, managing, directing, and coordinating the state government's involvement throughout the entire oil and gas value chain in Sabah pursuant to the CCA. SMJ works closely with Special Advisor, Datuk Seri Panglima Lim Haw Kuang. He has over 34 years’ experience with Royal Dutch Shell (Shell), where he held various senior leadership roles. He is also the Chairman of the Sabah CCA Executive Committee, Technical Advisor to the Sabah state government and Executive Chairman of Sabah Development Bank.

SMJ enjoys strong support and involvement from the Sabah state government. Leveraging on this solid backing, SMJ has been able to obtain commercially favourable terms from PETRONAS, for the acquisition of the participating interest in the Samarang Production Sharing Contract (PSC) and an associate stake in the Sabah Ammonia Urea (SAMUR) petrochemical plant. As a result of these favorable terms, we expect SMJ to possess sufficient financial capability to meet its debt obligations while consistently providing dividends to the state government. SMJ is targeting to acquire a 100% stake in Sabah International Petroleum Sdn Bhd (SIP) from Sabah Development Berhad. SIP holds a 10% ownership stake in Petronas LNG9 Sdn Bhd, which operates a liquefied natural gas (LNG) plant within the Bintulu LNG complex. 

While SMJ is expected to be financially self-sustaining, support from the Sabah state government will be readily available if the need ever arises, due to SMJ’s strategic importance to Sabah. There is strong alignment, with the state government strongly represented on SMJ's Board of Directors, which approves all significant strategic, operational, and financial decisions. The commitment is further evident from the state government’s agreement to provide a Letter of Support to sukuk holders. 

SMJ is assessed to have a lower risk profile compared to a typical oil and gas company. The Company’s role is that of a financial investor, entrusting the operational aspects to PETRONAS and other reputable companies with good track records and risk management, as well as established environmental, social, and governance (ESG) practices. SMJ will acquire stakes in PETRONAS-owned upstream, midstream and downstream oil and gas activities in Sabah. These operating assets must be profitable and generate healthy cashflow. Furthermore, SMJ's diversified business profile, encompassing upstream, liquified natural gas and petrochemical assets, renders the Company less susceptible to volatility in oil and gas prices. SMJ will refrain from investing in upstream assets during the high-risk exploration phase. Nevertheless, should high-quality exploration opportunities arise, SMJ retains the right to negotiate for free carry of exploration expenses from bidders of exploration blocks and/or back-in options from PETRONAS.

As SMJ is investing in mature and profitable oil and gas assets, we anticipate positive cash flow generation and strong debt coverage from the outset. Over the next three years, SMJ is projected to achieve an average annual net operating cash flow (NOCF) of approximately RM491 million. This is a conservative number since the cash flow projections are based only on existing assets (Samarang PSC, SAMUR and SIP) and SMJ’s conservative long-term crude oil price outlook relative to current prices. SMJ plans to issue up to RM1.2 bil sukuk to fund costs in relation to the acquisition of SIP in 2023 and another RM200 mil to fund ongoing capital expenditure (capex) requirements in 2025. This translates into a strong NOCF debt cover of around 0.3 times over the next three years.

We expect SMJ’s indebtedness to rise as it ramps up the acquisitions of PETRONAS assets. As the investments will be earnings accretive from the onset, we expect gearing to decline over time. Notwithstanding the high gearing, we expect SMJ’s debt coverage to remain healthy as the investments will be in profitable and cashflow generating assets. Also, being an investor in oil and gas assets, SMJ’s financial performance is dependent on the prices of crude oil and natural gas, which lie beyond its control. Persistently weak prices will adversely affect the Company’s business and financial performance, weakening its ability to fund capex and service financial obligations.


Analytical contacts
Thong Mun Wai
(603) 3385 2522


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.

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Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

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