MARC has assigned preliminary ratings of MARC-1IS/AA-IS to UEM Edgenta Berhad’s (UEM Edgenta) Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) under its Sukuk Murabahah Programme (Sukuk Murabahah) of up to RM1.0 billion. The outlook on the ratings is stable. UEM Edgenta’s long-term ratings are underpinned by MARC’s assessment of parental support from UEM Group Berhad. The rating agency considers UEM Edgenta as a strategic subsidiary of its parent based on its operations in key business segments within the group.
UEM Edgenta is an investment holding company with three main business segments: infrastructure services, integrated facilities management (IFM) and asset consultancy. The assigned ratings incorporate UEM Edgenta’s strong competitive position and long operating track record in the concession-based highway infrastructure maintenance and hospital support services, both of which provide stable earnings streams. The ratings are, however, moderated by UEM Edgenta’s increased leverage position and challenging prospects for its asset consultancy services that are related to the oil & gas and resource industries in Canada and Australia.
MARC observes that the acquisitions of the Singapore-based Asia Integrated Facility Solutions Pte Ltd (AIFS) and KFM Holdings Sdn Bhd in 2016 have elevated UEM Edgenta’s consolidated leverage to 0.64 times (2015: 0.24 times). While the acquisitions are part of UEM Edgenta’s expansion programme to strengthen its key businesses, MARC notes that the group has limited headroom for further debt-funded acquisitions without impacting its credit metrics.
UEM Edgenta, through its subsidiary Edgenta Mediserve Sdn Bhd (Edgenta Mediserve), has a 10-year concession agreement ending in 2025, under which the company provides hospital support services to 32 government hospitals in northern Peninsular Malaysia. MARC assess Edgenta Mediserve’s exposure to concession termination and renewal risks as low given its well-established track record in providing support services to government hospitals. The group also holds 40% joint venture stakes in each of the two entities undertaking hospital support services in Sabah and Sarawak following the cessation of its services in East Malaysia.
The acquisition of 100% equity interest in AIFS, which wholly owns UEMS Pte Ltd (UEMS), a provider of facilities management services to the healthcare sector in about 90 hospitals and healthcare institutions in Singapore, Taiwan and Malaysia, will broaden UEM Edgenta’s geographical reach in the IFM segment. UEMS has an operating track record of over 25 years with moderate earnings growth and low borrowing levels; nonetheless, UEMS’ contracts are short-term in nature, and therefore susceptible to renewal risk.
Its highway maintenance operation is undertaken by Edgenta PROPEL Berhad (Edgenta PROPEL), which has a major contract until 2038 under a master maintenance agreement with related company Projek Lebuhraya Usahasama Berhad (PLUS), the owner of a portfolio of toll road concessions in Peninsular Malaysia. MARC views the payment risk from PLUS as minimal given its very strong capacity to meet its contracted obligations. Edgenta PROPEL undertakes routine maintenance works for several other highways and has secured several new contracts, including Selangor Zone III state road maintenance, Cikampek-Palimanan toll road in Jakarta, and Lebuhraya Pantai Timur 2 Sdn Bhd’s 184 km East Coast Expressways.
The group’s non-concession operations, mainly asset management and consultancy, are largely undertaken by subsidiary Opus Group Berhad (Opus) through its 61%-owned New Zealand-based Opus International Consultants Limited (Opus NZ). The company’s performance was dragged down by sizeable impairment charges in 2016 arising from consultancy services to the mining and oil and gas sectors in Canada and Australia respectively.
For 2016, UEM Edgenta recorded lower consolidated revenue and earnings of RM2.9 billion and RM113.8 million (2015: RM3.1 billion; RM305.4 million) partly due to cessation of hospital support services operations in East Malaysia and losses incurred by the Canadian and Australian subsidiaries. MARC understands that UEM Edgenta will undertake an initial issuance of RM300 million under the sukuk programme, of which RM60.6 million will be used to refinance existing borrowings. The drawdown is expected to increase the group’s leverage ratio to about 0.80 times. At the holding company level, UEM Edgenta is reliant on dividend income mainly from Edgenta PROPEL, Edgenta Mediserve and Opus to meet its financial obligations. Concession revenue-supported dividends upstreamed by its infrastructure maintenance and hospital support businesses are expected to provide above 2.0 times coverage of the holding company’s interest obligations.
The stable outlook incorporates MARC’s expectations that UEM Edgenta would maintain credit metrics that are commensurate with the current rating band. However, further increases in leverage and/or weakening earnings prospects in the non-concession business could result in downward rating pressure. Upward rating migration is conditional upon improvement in the group’s overall business risk profile and/or its key financial metrics.
Contacts: Cheah Wan Kin, +603-2082 2232/ firstname.lastname@example.org; Taufiq Kamal, +603-2082 2251/ email@example.com
March 15, 2017