MARC
has affirmed its rating of BBB-IS on Senai-Desaru
Expressway Berhad’s (SDEB) RM1.89 billion Islamic Medium-Term Notes
(Restructured Sukuk) Programme with a stable outlook.
The
rating incorporates the improving traffic volume on the expressway and the
accommodative payment structure under the programme which provides SDEB with
headroom to improve its cash flow coverages. Under the Restructured Sukuk,
initiated in 2014, the step-up profit rate structure eases liquidity pressure
in the early years of the programme’s tenure, allowing for cash build-up to
meet its back-ended principal obligations. In addition, extension of the
concession to 2053 from the initial 2038 allows for upside benefit from traffic
volume growth generated from planned developments in the expressway’s service
areas. The rating also takes into account SDEB’s continued weak credit profile,
characterised by persistent negative shareholders’ funds.
MARC
notes that total annual traffic volume on the Senai-Pasir Gudang-Desaru
Expressway (SDE), which comprises a 77km tolled inter-urban expressway between
Senai and Desaru with a connecting highway to Pasir Gudang, increased 17.6%
year-on-year (y-o-y) to 292.4 million passenger car unit-kilometres (pcu-km).
The growth was 10.6% higher than the projected traffic volume. The improvement,
despite a toll hike in October 2015, has been attributed to increased
development activities along the expressway, widening works on the toll-free
alternative, and the ongoing projects in Pengerang, where the multi-billion
ringgit RAPID project is in progress. Nonetheless, given the actual traffic
CAGR of 6.9% over the last three years, traffic volume growth would need to at
least sustain to meet traffic projections: the SDE is projected to achieve CAGR
of 8.3% from 2016 to 2022, normalising to 7.4% until 2038 before declining to
5.0%.
On
the back of improved traffic volume, SDEB recorded an annualised growth of
19.4% y-o-y in revenue for the first eight months of the financial year ending
June 30, 2016 (8MFY2016), as opposed to 10.0% in the previous corresponding
period. Operating profit margin was low at 3.5% (8MFY2015: 42.1%) following
maintenance and highway asset replacement costs, which was undertaken ahead of
schedule. For 8MFY2016, SDEB registered a pre-tax loss of RM96.1 million
(FY2015: negative RM123.7 million on excluding gains from revised terms of the
irredeemable cumulative unsecured loan stocks (ICULS) during the restructuring
exercise). Consequently, accumulated losses widened to RM955.1 million (FY2015:
negative RM859.0 million).
The
sensitivity analysis on SDEB’s cash flow projections demonstrates that the
company can withstand a drop of 7.4% in traffic volume from the base case
projections throughout the sukuk tenure and a higher-than-expected operating
cost of 4.8% per annum. MARC notes that in the absence of toll hikes and no
government compensations given, SDEB’s debt servicing ability would come under
pressure starting in FY2017. The sensitivity results also show that delays in
the RAPID project would weigh on SDEB’s traffic volume and, consequently its
cash flows to meet principal repayment of the sukuk, which commences by FY2039.
The back-ended amortisation structure provides SDEB headroom to strengthen its
liquidity position in order to maintain compliance with the covenanted finance
service cover ratio (FSCR) of 1.25 times, a requirement that commences from
June 30, 2018 and runs throughout the remaining tenure of the Restructured
Sukuk.
As
at 8MFY2016, the company’s cash and cash balances stood at a low RM26.6 million
relative to its financial obligations. MARC remains concerned on SDEB’s
sizeable obligations under the concession agreement to widen and upgrade the
Cahaya Baru-Pasir Gudang and Ulu Tiram-Cahaya Baru stretches in 2016 and 2017
respectively. However, due to the low usage of the aforementioned stretches,
SDEB is seeking a deferment from the government as it will need to incur costs
of about RM373.6 million to carry out the upgrading works. The sukukholders
have given SDEB an extension until June 30, 2016 to obtain approval, failing
which a technical breach would occur.
The
stable outlook reflects SDEB achieving sustainable traffic performance and
timely receipt of government compensations as demonstrated in the recent years.
Any revision to the rating and/or outlook would depend on the outcome of
deferment on the upgrading works or any material deviations from the
assumptions set out in the projections.
Contacts:
Nicola Tan, +603-2082 2262/nicola@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.
June 16, 2016
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