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RAM Ratings affirms Pengurusan Air SPV’s AAA/P1 sukuk ratings
Published on 24 Dec 2024.
RAM Ratings has affirmed the AAA/Stable rating of Pengurusan Air SPV Berhad’s (PASB or the Company) RM20 bil Islamic Medium-Term Notes Programme and the P1 rating of its RM2 bil Islamic Commercial Papers (ICP) Programme (collectively, the Sukuk). The ICP Programme may also be issued as a sustainability sukuk.
The affirmation is premised on our view that PASB will continue to derive substantial financial flexibility from the Government of Malaysia via Minister of Finance (Incorporated) (MOF Inc.) – PASB’s ultimate holding company. PASB is the financing conduit and 100%-owned subsidiary of Pengurusan Aset Air Berhad (PAAB or the Group), the national water asset company mandated to facilitate the water restructuring exercise in Peninsular Malaysia and the Federal Territory of Labuan pursuant to the Water Services Industry Act 2006 (WSIA). The Group is also tasked with developing and financing water infrastructure in these regions.
An irrevocable and unconditional Purchase Undertaking Deed provided by PAAB under the transaction structures gives sukukholders recourse to the Group. As such, the ratings of the Sukuk reflect PAAB’s credit risks. Our view of the Group’s role as critical and its relationship with the government as integral is also a rating factor. PAAB’s unique public policy function has warranted strong management influence and support from MoF Inc. to date. We foresee the government continuing to provide both financial and/or non-financial assistance, besides maintaining close oversight via its representation on the Group’s board. These considerations, combined, make extraordinary support from MoF Inc. “almost certain” in our view, if needed. As such, the Group’s rating essentially mirrors the government’s.
PAAB’s performance in FY Dec 2023 was satisfactory, backed by increased rental collections given project completions. Net profit was however halved from prior-year levels in the absence of substantial tax reversals. The Group chartered strong earnings in 7M FY Dec 2024 (revenue: +8.3% y-o-y; pre-tax profit: +12.0% y-o-y), mostly driven by the commencement of lease rentals from the completion of Phase 1 of the Langat 2 water treatment plant – a major project. We anticipate healthy earnings growth in the medium term in view of the robust project pipeline for the next five years. While debt levels will correspondingly rise, gradual profit accumulation will help moderate the Group’s aggressive capital structure. Although its heavy debt load increased to RM28.5 bil as at end-July 2024, gearing eased to 11.5 times from historical levels of above 15 times seen pre-2023.
PAAB’s interest coverage ratio of above 1 time indicates that its operating cash flows are sufficient to meet annual interest obligations. We expect the Group to remain reliant on MoF Inc.’s implicit support, via sukuk drawdowns, to fund capital expenditure and repay debt obligations. However, major debt funding requirements to support asset transfers for Terengganu and Labuan – the two states that have yet to migrate to the new regime – are not expected in the medium term. To date, 10 states have migrated to the regime.
We draw comfort from PAAB’s well spread-out debt repayment profile and continued accessibility to the sukuk market for additional funding and refinancing. The Group is anticipated to gain self-sufficiency only in the longer term when state water operators gradually strengthen their financial standing through frequent and gradual tariff increments.
Analytical contacts
Hani Hamizah Nor Hashim
(603) 3385 2575
hani@ram.com.my
Chong Van Nee, CFA
(603) 3385 2482
vannee@ram.com.my
Media contact
Sakinah Ariffin
(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.
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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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