RAM Ratings reaffirms AAA/P1 ratings of Pengurusan Air Selangor’s RM10 billion Sukuk Murabahah Programme

RAM Ratings has reaffirmed the respective long and short-term AAA/Stable and P1 ratings of Pengurusan Air Selangor Sdn Bhd’s (Air Selangor or the Company) Islamic Medium-Term Notes Programme of up to RM10 bil in nominal value and Islamic Commercial Papers Programme of up to RM10 bil in nominal value. Both facilities (collectively, the Sukuk) have a combined limit of RM10 bil in nominal value. Under both facilities, Air Selangor may opt to issue Sustainable & Responsible Investment (SRI) Sukuk Kelestarian that complies with its Sustainable Development Sukuk Kelestarian Framework. The Sukuk Kelestarian has been reviewed by RAM Sustainability Sdn Bhd and is aligned with transparency and disclosure requirements. 1 Kindly refer to the second opinion report published on 9th November 2020 for further information.

Air Selangor became the sole licensee for water treatment and distribution to consumers in Selangor and the Federal Territories of Kuala Lumpur and Putrajaya on 13 September 2019 after it was awarded an individual license under the Water Services Industry Act 2006. The Company is wholly owned by Selangor’s investment arm, Air Selangor Holdings Berhad (formerly known as Kumpulan Darul Ehsan Berhad), and ultimately owned by Menteri Besar Selangor (Incorporated).

Based on RAM’s rating methodology for government-linked entities, Air Selangor is considered a “dependent” entity as it has been tasked with the public policy role of providing essential water services. The ratings are supported by our expectation that the Company will continue to derive substantial financial flexibility from the Selangor government in view of its pivotal role in the state’s water sector. The state government has demonstrated a track record of support for Air Selangor which has taken the form of loans, grants and transfers of water supply service assets, in exchange for the subscription of ordinary shares in the Company. As such, we have equated the ratings of the Sukuk to that of the state. Selangor’s State Implicit Strength (SIS) is assessed to be robust, the highest ranking in RAM’s SIS Framework.

As an essential service provider, Air Selangor’s operations were not affected by movement restrictions amid the pandemic, apart from slower pipe replacements. Air Selangor’s water operations have progressively improved over the years, with lower non-revenue water levels (2020: 28.5%; 2019: 29.7%) and higher water reserve margins (2020: 11.87%; 2019: 10.97%). In terms of treated water quality in 2020, Air Selangor achieved 99.74% compliance with the Ministry of Health Drinking Water Quality Standard. The utilisation of technology has improved pipe leakage detection along its distribution network to allow for corrective works sooner.

Air Selangor saw fewer water supply disruptions in 2021 following greater inter-agency coordination to combat water source pollution issues, which may have also been partly moderated by curtailed economic activities during the pandemic. The authorities revised water legislation to increase fines for water pollution offences, implemented bio-remediation projects, enabled 24-hour surveillance at sensitive water sources, and implemented four raw water pumping projects to mitigate risks of operational stoppages.

Having missed a tariff increase previously anticipated to take place in April 2021 (via the Tariff Setting Mechanism, TSM) due to the pandemic and the resulting economic situation, the tariff increase is now expected to be implemented in April 2022, pending Cabinet approval. However, the pandemic along with the current political and economic situations may hinder timely implementation of such a policy. Although operationally profitable, Air Selangor continues to record bottom line losses due to hefty depreciation, leasing and financing charges, coupled with the delayed implementation of the TSM by the Federal Government. This highlights the crucial need for a tariff hike.

As at end-August 2021, RM1.15 bil had been issued from the Sukuk Programme. Air Selangor is projected to draw down a total of RM5.2 bil from 2021 to 2024, largely for capital expenditure of the new Rasau water treatment plant in Klang. As such, we expect Air Selangor to be highly leveraged, registering adjusted gearing in the range of 2.05 times to 4.19 times and weak adjusted funds from operations debt coverage of between 0.02 times and 0.05 times.

The Company’s liquidity position is sound and is expected to remain self-sufficient over the next five years. Air Selangor will meet obligations under the state water restructuring exercise, the repayment of leases to Pengurusan Aset Air Berhad and borrowings with a combination of funds from a healthy cash pile, internally generated cash and further drawdowns from the Sukuk Programme. Overall, RAM expects financial support to be forthcoming from the state government, should the need arise.

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1 Transparency and disclosure requirements in line with Securities Commission Malaysia’s SRI Sukuk Framework, the ASEAN Green Bond Standards, the ASEAN Social Bond Standards, the ASEAN Sustainability Bond Standards and the globally recognised Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines.



Analytical contacts
Lee Jo Yee
(603) 3385 2533
joyee@ram.com.my

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

Published on 13 Sep 2021.