RAM Ratings has upgraded the rating of Sarawak Energy Berhad's (SEB or the Group) RM15 bil Sukuk Musyarakah Programme (2011/2036) to AAA (from AA1). Concurrently, the rating outlook has been revised from positive to stable.
The upgrade reflects the sustained improvement in SEB's credit metrics, mainly attributable to its stronger business fundamentals amid the progressive maturity of the Sarawak Corridor of Renewable Energy (SCORE) and the acquisition of the Bakun hydroelectric plant (HEP). The rating also considers the solid support that the Group enjoys from both the Sarawak state and federal governments.
SEB's monopoly over the generation, transmission, distribution and retail of electricity in Sarawak highlights its strategic role in making available and delivering electricity to power the State, and as a key facilitator of the SCORE. Based on our rating methodology for government-linked entities, the Group benefits from a very high likelihood of extraordinary government support in the event of financial distress. SEB is wholly owned by the Sarawak Government through the State Financial Secretary.
The SCORE development at Samalaju Industrial Park is no longer in its infancy. Most customers that had signed power purchase agreements with SEB are now operational, with some having progressively increased their demand. Press Metal Aluminium Holdings Bhd (rated AA3/Stable by RAM) and OM Materials (Sarawak) Sdn Bhd (OM Sarawak) committed to larger capacity uptakes during the reviewed period.
SEB's revenue was lifted 10.1% to RM5.42 bil in fiscal 2018, mainly driven by electricity sales to organic customers, as well as OM Sarawak and Perusahaan Listrik Negara export to Indonesia. Sales increased another 5.7% y-o-y to RM2.80 bil in 1H FY Dec 2019. Overall, SEB's available power capacity under the first phase of Samalaju Industrial Park has been fully allocated. Its reserve margin is expected to narrow to about 20% in 2025, before the completion of the 1,leh HEP in 2026.
Notably, stronger demand and cost savings arising from the acquisition of the Bakun HEP in 2017 significantly reduced SEB's unit operating cost, thus boosting its operating profit before depreciation, interest and tax (OPBDIT) margin to a respective 64.6% and 66.7% in FY Dec 2018 and 1H FY Dec 2019 (FY Dec 2016: 34.0%). Given its healthier financials, the Group's FFODC ratio improved to 0.17 times in both FY Dec 2018 and 1H FY Dec 2019 (FY Dec 2017: 0.13 times), exceeding our projection of 0.140.15 times.
While SEB's debts had risen 3.2% to RM20.50 bil as at end-1H FY Dec 2019 compared to FY Dec 2017, its accumulated earnings enlarged its equity base and amply offset its heftier debt load. Correspondingly, the Group's gearing ratio eased to 2.20 times before improving further to 2.04 times as at end-1H FY Dec 2019 (end-FY Dec 2017: 2.47 times) broadly in line with our earlier expectations. Going forward, we expect SEB's credit metrics to stay healthy, in line with the anticipated ramp-up in demand from bulk customers, based on its planned capacity expansion.
Meanwhile, the ratings remain constrained by demand and customer concentration risks given that the SCORE contributes a major portion of SEB's business. Its customer base remains dominated by Press Metal's facilities in Sarawak (including PMB Silicon Sdn Bhd), which constituted 40.6% of the Group's overall unit electricity sales and contributed 31.2% of its revenue from electricity sales in 1H FY Dec 2019. At the same time, SEB's top five bulk customers accounted for a respective 69.5% and 59.3% of its electricity volume and sales.
The Group is also exposed to power supply concentration risk as the Bakun HEP supplies slightly more than half of Sarawak's installed capacity. That said, the full commissioning of the 624 MW Balingian coal-fired plant in September 2019 and SEB's upcoming plant-ups over the next decade will help moderate this risk.
Chong Van3) 3385 2482
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