RAM Ratings has affirmed the respective AAA/Stable and P1 ratings of Pengurusan Air Selangor Sdn Bhd’s (Air Selangor or the Company) Islamic Medium-Term Notes Programme and Islamic Commercial Papers Programme (collectively, the Sukuk, which has a combined limit of RM10 bil).
TThe agency said that Air Selangor’s sukuk ratings are linked to the credit rating of its parent, the Selangor state government. Selangor’s State Implicit Strength (SIS) is assessed to be robust, the highest ranking under RAM’s SIS Framework. Currently in a net cash position, the state government has a strong capacity to support Air Selangor. Given the Company’s essential role as an indispensable public utility supplying treated water throughout the Klang Valley, we expect state financial support to be forthcoming, if required. Past support has included loans, grants and transfers of water infrastructure.
The state owned company recorded a higher revenue of RM2.5 bil in 2023 (2022: RM2.3 bil) following a tariff hike imposed on non-domestic users in August 2022 (Klang Valley’s first since 2006), which helped mitigate rising costs. The still-low water tariffs are insufficient to cover sizeable depreciation, leasing and financing costs. We expect the Company to stay in the red in the near to medium term, as long as tariffs do not allow for full cost recovery.
It expects to incur sizeable capital expenditure (capex) of about RM7 bil between 2025 and 2027, mainly for pipe replacements and development of the Rasau Water Supply Scheme. To sustain its operations and meet financing and capex needs, the Company relies on continuous Sukuk drawdowns, which will result in hefty leverage and weak coverage metrics (2028 projections: 12 times and 0.05 times respectively). With RM6.2 bil drawn as of August 2024, the Company intends to upsize the combined programme limit to RM20 billion, and revise the Islamic Medium-Term Notes Programme tenure to perpetual. We do not view these changes to have a rating impact, given the Company’s credit linkage to the state government.
RAM said Air Selangor’s liquidity position remains healthy. Cash reserves of RM904 mil as at end-June 2024 sufficiently cover short-term debts of RM726 mil due in the next 12 months. The cash and cash equivalents to short-term debts ratio was 1.25 times on the same date. Air Selangor’s operational performance metrics remain commendable. Its 27.7% proportion of non-revenue water in 2023 (2022: 27.8%) is among the best in the country, outperforming the National Water Services Commission’s target.
