[RAM] RAM Ratings affirms Sarawak Energy's AAA rating

RAM Ratings has affirmed the AAA/Stable rating of Sarawak Energy Berhad’s (SEB or the Group) RM15.0 bil Sukuk Musyarakah Programme (2011/2036). 

The affirmation is premised on SEB’s critical role as Sarawak’s sole power utility company and a key facilitator of the Sarawak Corridor of Renewable Energy (SCORE). The state government’s full ownership of SEB, through the State Financial Secretary, underlines the Group’s very strong relationship with the former. As such, we view it highly likely for SEB to receive extraordinary government support in the event of financial distress, based on RAM’s support assessment for government-linked entities.

SEB has full control over the operating generation plants, transmission and distribution assets, as well as the retail of electricity in Sarawak. The Group’s business remains resilient on the back of long-term take-or-pay power purchase agreements (PPAs) with bulk customers in SCORE, albeit highly concentrated in a single off-taker. 

SEB posted a robust set of financial results in FY Dec 2022. Revenue climbed 15.1% y-o-y to RM6.96 bil while operating profit before depreciation, interest and tax (OPBDIT) was up 19.7% to RM3.70 bil, attributable to the first full-year contribution from Press Metal Aluminium Holdings Berhad’s (Press Metal) Phase 3 smelter that commissioned in October 2021. Coupled with lofty other income and tax credit, its net profit jumped to RM2.73 bil (FY Dec 2021: RM0.82 bil). In 1H fiscal 2023, net profit normalised to RM0.80 bil but still outperformed results in fiscal 2020 and 2021, given sturdier OPBDIT. While funds from operations debt coverage (FFODC) as of end-June 2023 ebbed to 0.21 times, gearing was an improved 1.14 times, supported by increased retained earnings (end-December 2022: 0.23 times and 1.20 times). 

Considering the Group’s planned generation and network expansion as well as potential overseas ventures, its average capital and investment commitments for the next three years (2024-2026) are estimated to escalate to RM4.35 bil (FY Dec 2022: RM1.79 bil). While these will mostly be debt-funded, staggered earnings and higher operating cash flow (as more bulk customers commission and/or increase energy uptake) should provide some headroom for new borrowings. Under our sensitised cashflow scenario that assumes a more gradual ramp-up of electricity demand, SEB’s average projected FFODC of 0.16 times and gearing of 1.17 times (for fiscal 2024-2026) remain supportive of its rating.
The Group’s growth potential is underlined by continued rising interest in SCORE. For the 12 months ending June 2023, SEB inked two new PPAs with a combined capacity of 120 MW and two terms sheets at 60 MW in total. Further upside is expected to stem from the Group’s distinct position as a predominantly renewable electricity provider, which should strengthen its pricing power when negotiating new PPAs. 

SEB’s business is structurally skewed towards contributions from bulk customers, particularly Press Metal (debt facilities rated AA2/Stable by RAM) and its subsidiary PMB Silicon Sdn Bhd. We draw comfort from Press Metal’s commendable performance and good payment record to date. Take-or-pay clauses under PPAs also give the Group some cashflow stability. Supply concentration risk posed by the Group’s reliance on the Bakun hydroelectric plant will be alleviated by new plant-ups.


Analytical contacts
Chu Jia Ying
(603) 3385 2519
jiaying@ram.com.my

Chong Van Nee, CFA 
(603) 3385 2482
vannee@ram.com.my

Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my