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RAM Ratings assigns AA1(s) rating to Samalaju's proposed sukuk.

RAM Ratings has assigned AA1(s)/Stable rating to Samalaju Industrial Port Sdn Bhd's (Samalaju or the Company) proposed Sukuk Murabahah programme of up to MYR 950 million (the Proposed Sukuk). The rating reflects an unconditional and irrevocable corporate guarantee extended by Samalaju's parent company, Bintulu Port Holdings Berhad (BPHB, rated AA1/Stable/P1).

"In view of BPHB's solid relationship with the Government of Malaysia - given the latter's shareholdings in BPHB through various government agencies, the Sarawak Government and Petronas - the State is seen as having an incentive to provide the Company with financial assistance, which includes subscribing to a portion of the Proposed Sukuk, if necessary. This is to facilitate the success of the Sarawak Corridor of Renewable Energy while ensuring Samalaju meets its financial and operating obligations. We believe that the Company will continue to derive financial flexibility from BPHB and the State.

"Samalaju will be the operator of the Samalaju Port (the Port) upon its expected completion by 4Q FY Dec 2016 under a 40-year contract. The 156-hectare deep-sea port costing MYR 1.9 billion will be dedicated to serving energy-intensive players at the Samalaju Industrial Park (the Samalaju Park) and is anticipated to handle a maximum capacity of 46 million tonnes when fully completed. The Port will function as a logistical hub for the import of raw materials and export of finished products from heavy-industry companies located at the Samalaju Park. The construction of the Port will take place in 2 phases - the construction of Phase 1, which is ongoing, is expected to cost MYR 1.6 billion, while interim port facilities had been completed in April 2014 and have been operational since.

"Delays in the construction of capital dredging (and reclamation work) and breakwater section has, as at end-November 2015, pushed Samalaju approximately 6.7 months behind schedule. While this delay period is both within the tolerance of the Company's and RAM's assumptions, we have, however, conservatively factored in an additional MYR 61.3 million construction cost overrun in our projections against Samalaju's estimate of MYR 28.4 million. We have also assumed a lower cargo volume after the Port becomes fully operational, as to date, none of the 6 energy-intensive companies that will operate at the Samalaju Park, have made any long-term throughput commitment to the Port. As a result of this, we foresee Samalaju incurring further debt (in absence of shareholder support), with the projected gearing ratio to peak at a high 2.95 times over the next 5 years and its funds from operations debt coverage ratio averaging at a weak 0.06 times, as compared to the Company's projection of 1.30 times and 0.17 times, respectively. Any additional debt would be subordinated to the Proposed Sukuk in terms of coupon, tenure and security. The Port will be financed by proceeds from the Proposed Sukuk, a government grant of MYR 500 million and an equity injection from BPHB of MYR 600 million.

"Apart from operational risk, Samalaju is exposed to regulatory risk as the Port's proposed tariffs, although having been approved by the State Government in October 2015, have yet to be gazetted (expected to be completed by end-2015). We highlight that the Company's earnings and cashflow will come under further pressure should the gazetted tariffs be lower than the proposed tariffs."

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Publication:CPI Financial
Geographic Code:9MALA
Date:Dec 17, 2015
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