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RAM Ratings upgrades Cenergi’s ratings
Published on 15 Sep 2023.
RAM Ratings has upgraded Cenergi SEA Berhad’s (Cenergi or the Group) corporate credit ratings and the issue ratings of its RM1.5 bil Senior Sukuk/Subordinated Perpetual Sukuk Programme (2021/2121) (see Table 1). The Subordinated Perpetual Sukuk is rated two notches below the Senior Sukuk to reflect increased loss severity and the risk of non-performance relative to senior financing obligations.
Table 1:
The upgrade is premised on our assessment that Cenergi has a close relationship with UEM Group Berhad (UEM), its new parent following a restructuring exercise prompted by their common ultimate shareholder, Khazanah Nasional Berhad (Khazanah), to streamline its sustainability business. UEM is Khazanah’s designated flagship vehicle to help drive the government’s policy shift towards a high-value green economy, as highlighted by the National Energy Transition Roadmap (NETR). Cenergi’s extensive experience and proven capability in the local renewable energy (RE) space are therefore important to UEM. UEM has made clear its commitment to providing the necessary expertise and funding to grow the Group into a domestic green champion. The ratings are nevertheless moderated by Cenergi’s still-small business scale and nascent financial footing.
Cenergi’s business spans biogas energy, solar energy, energy efficiency and biomass pellets, which fit well into the NETR narrative. It is the biggest grid-connected non-miller biogas provider under Malaysia’s Feed-in Tariff (FIT) scheme, with a market share of 12.8% as of end-August 2023. On the same date, Cenergi’s solar fleet consisted of ground-mounted farms and rooftop solar installations with capacities of 45 MW and 14.1 MWp, respectively. The 29.99 MW solar farm recently bagged by the Group under the government’s Corporate Green Power Programme (CGPP) is its largest project to date. The biogas and solar segments collectively contribute the bulk of the Group’s earnings, a trend which is expected to continue in the medium term.
Cenergi’s local biogas projects are backed by long-term contracts with Tenaga Nasional Berhad as the offtaker. They enjoy attractive tariffs and priority of despatch, with no cash penalties for completion delays or underperformance. Overall plant performance during the review period was satisfactory, with downtime mainly due to feedstock shortages and grid maintenance. The Group’s strong project pipeline and a higher biogas quota under the FIT will continue to drive its growth momentum.
The evolving domestic landscape for solar projects has seen added but manageable operating risks. The newly awarded CGPP project entails some counterparty risk, given that a small portion of the contract price will be settled between Cenergi and the corporate offtakers. Meanwhile, the Group’s 8 MW solar farm under the New Enhanced Dispatch Arrangement scheme will face cashflow volatility in the absence of a fixed tariff rate. The Group intends to take on the price risk and separately seek buyers for RE certificates to maximise returns.
We are watchful of Cenergi’s rapid expansion mode and scale-up risk as entry into less familiar markets may cause execution challenges and jeopardise its financial profile. The hefty upfront capital expenditure will necessitate additional borrowings, although moderated by planned equity injections from UEM and a larger operating cash flow. While the NETR will provide more business opportunities, the industry’s relatively low entry barriers may lead to margin compression. We draw some comfort from Cenergi’s first-mover advantage in the biogas sector and potential intercompany collaborations within the larger UEM group.
In FY Dec 2022, Cenergi’s operating revenue jumped 29% y-o-y to RM60 mil as more projects come online. However, adjusted pre-tax profit (excluding one-off items) barely broke even owing to a heftier finance cost. Our sensitised cashflow projection, which assumes a lower electricity output, delays in project completion and higher capital expenditure, indicates that the Group’s gearing for fiscal 2023-2025 will average 1.23 times while funds from operations debt coverage will come in at 0.11 times (end-December 2022: 1.51 times and 0.12 times). Moderating the weak ratios is Cenergi’s healthy operating profit before depreciation, interest and tax margin which is envisaged to hover around 39%.
Analytical contacts
Chu Jia Ying
(603) 3385 2519
jiaying@ram.com.my
Chong Van Nee, CFA
(603) 3385 2582
vannee@ram.com.my
Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@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
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