RAM Ratings has revised to positive from stable the outlook on the AA1 rating of Sarawak Energy Berhad's (SEB or the Group) RM15 billion Sukuk Musyarakah Programme (2011/2036). The positive outlook reflects a strong uptrend in SEB's electricity sales, which if maintained, is expected to lead to improvements in the Group's credit metric indicators. Increased sales were complemented by cost savings following the acquisition of Sarawak Hidro Sdn Bhd, effective 16 August 2017, which in turn owns the Bakun hydroelectricity plant.
The issue rating reflects SEB's healthy financial performance, along with continued strong support that the Group enjoys from the Sarawak and federal governments, given its monopoly over the generation, transmission and distribution of electricity in the state and, hence, its pivotal role in the Sarawak Corridor of Renewable Energy (SCORE). The Group, in our view, benefits from a ''very high'' likelihood of extraordinary governmental support in the event of financial distress, based on our rating methodology for government-linked entities.
The SCORE at the Samalaju Park has passed its infancy stage and the Park's bulk customers have progressively commissioned and ramped up demand. As a result, SEB's electricity sales climbed a sturdy 14.8% y-o-y in 2017 and another 12.4% y-o-y in 1H 2018, largely attributable to OM Materials (Sarawak) Sdn Bhd, Pertama Ferroalloys Sdn Bhd and Press Metal Berhad's Phase 3 plant. SEB's electricity sales are anticipated to continue to grow in tandem with existing customers' plant expansions as well as the commissioning of new plants such as that of PMB Silicon Sdn Bhd, which signed a power purchase agreement with the Group in 2017.
Subsequent to SEB gaining ownership of the Bakun plant, profits of Sarawak Hidro are retained within the Group. Despite the acquisition of Sarawak Hidro, SEB's total debt expanded only slightly to RM19.86 billion as at end-2017 (total adjusted debt as at end-2016: RM19.04 billiRAM had already considered capacity payment obligations to Sarawak Hidro as part of the Group's total adjusted debt prior to the purchase.
Even after considering SEB's capacity expansion plans under Phase 2 of the Samalaju Park, we expect the Group's cash generation to continue to trend upwards, resulting in a higher funds from operations debt coverage ratio (FFODC) of 0.14 times and 0.15 times in FY Dec 2018 and FY Dec 2019, respectively (past three-year average of adjusted FFODC: 0.10 times). Additionally, an enlarged equity base arising from profits retained over the years would lead to improved gearing of 2.19 times and 1.86 times as at end-2018 and end-2019, respectively (past three-year average of adjusted gearing: 2.75 times).
The rating continues to be moderated by the demand risk that SEB faces, considering that progressive take-up by bulk customers is dependent on the completion of their facilities and their financial viability. The Group is also exposed to customer concentration risk as bulk off-takers create lumpiness in demand growth. Press Metal's facilities in Sarawak accounted for 41% of SEB's total energy sales (or 31% in ringgit terms) in 1H 2018. The Group is susceptible to power supply concentration risk as 52% of the state's installed capacity emanates from the 2,400-MW Bakun plant, although this reliance has been moderated since the completion of the 944-MW Murum hydropower plant in June 2015. Ownership of the Bakun plant allows SEB full access to and control over its operations, providing more certainty over security of electricity supply from the plant. The Group's plant-ups over the next decade are expected to further reduce supply concentration risk.
Chin Wynn, CFA
(603) 7628 1170
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