Senai-Desaru Expressway Bhd - 2011

MARC has affirmed its ratings of A+IS and A-IS on Senai-Desaru Expressway Berhad's (SDEB)  RM1.89 billion nominal value Senior Sukuk Ijarah Medium Term Notes (Senior Sukuk) Programme and RM3.69 billion nominal value Junior Sukuk Ijarah Medium Term Notes (Junior Sukuk) Programme. SDEB, a 70:30 joint-venture between Rancak Bistari Sdn Bhd and Johor state-owned YPJ Holdings Sdn Bhd, is the concessionaire and highway operator of the Senai-Pasir Gudang-Desaru Expressway (E22). The rating outlook has been revised to negative from stable to reflect pressure on SDEB’s financial profile arising from the significant under-performance of traffic on E22 relative to the traffic consultant’s projections. The actual traffic generally tracks MARC’s worst-case scenario estimates. While SDEB’s satisfactory liquidity position provides a degree of certainty that it will be able to meet its short-term obligations, MARC opines that meaningful and sustained improvement in traffic volumes during the current ramp-up phase will be needed to offset the downward rating pressure. Extended underperformance of traffic on E22 will result in finance service coverage levels and liquidity that would no longer be consistent with current ratings.

Actual traffic on E22 was only 51% of projections in the first 11 months of 2011. The lower traffic volume was partly due to the late opening of the last stretch of the highway from Pasir Gudang to Desaru. The E22’s first phase which links Senai to Pasir Gudang (Package 1 and Package 2) had commenced tolling on October 10, 2009. The expressway’s Package 3, which links Pasir Gudang to Desaru, was opened to the public on June 10, 2011 after a four-month delay and commenced tolling on July 10, 2011. Average daily traffic continues to be 38% below projections following the full opening of the highway. Traffic volume on the E22 has been heavily affected by the availability of alternative toll-free routes and high toll-differential between the E22 and the North-South Expressway.

Reflecting the underperformance of traffic on the E22, SDEB’s revenue in the financial year ending June 30, 2011 (FY2011) was 54.6% below projections at RM13.2 million (FY2010: RM7.1 million). Operating profit for FY2011 had declined to RM2.6 million compared to FY2010’s operating profit of RM16.4 million. The prior fiscal year results had benefited from RM20.1 million of compensation arising from construction delays. Despite the lower-than-expected revenue figures, SDEB’s liquidity position appears to be sufficient  to  meet  its  operational  requirements  and debt obligations in the next 18 months, with cash
flow from operations (CFO) and cash and bank balances of RM1.33 million and RM46.9 million respectively (FY2010: RM17.0 million; RM141.7 million) vis-à-vis projected figures of RM0.76 million and RM52.8 million respectively.

MARC will continue to monitor traffic volume of the E22 closely and SDEB’s credit metrics to the extent that downside risks would be primarily driven by extended underperformance of traffic and deteriorating liquidity. Conversely, the rating may be revised to stable if deviations from base case traffic and cash flow projections narrow to a meaningful extent.

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