Zecon Toll Concessionaire Sdn Bhd - 2007

MARC has affirmed the rating of A+ID of Zecon Toll Concessionaire Sdn Bhd’s (“ZTC”) RM60 million Bai-Bithaman Ajil Islamic Debt Securities (“BaIDS”). The rating carries a stable outlook. ZTC’s revenue generating asset is the Tun Abang Salahuddin Bridge in Sarawak.

The rating reflects the satisfactory traffic and revenue profile of the bridge relative to debt service under the BaIDS, the presence of relatively low toll pricing increase approval risk and ZTC’s improving financial performance. The rating is constrained by the availability of alternative routes, sensitivity of traffic growth to the proposed pace of residential and commercial developments on the northern bank of the Sarawak River as well as ZTC’s negative but improving net working capital position.

ZTC is the concession holder of the 339-metre Tun Abang Salahuddin Bridge which links the northern and southern parts of Kuching. Kuching, the capital city of the state of Sarawak, is divided into two parts by the Sarawak River. ZTC was awarded the 33-year concession to design, construct and maintain the bridge in 1998. In addition to the right to receive toll revenues generated by the bridge, the State Government had alienated to ZTC 2,117 acres of land around the bridge area valued at RM166 million as a consideration for the development cost of the bridge. All of the concession land was disposed to entities related to Zecon Bhd (formerly known as Zecon Engineering Bhd) (“Zecon”), ZTC’s parent company. The construction of the bridge was completed in September 2003 and opened for tolling in October in the same year. Since the opening of the bridge, both traffic volume and toll revenue have been higher than initially forecasted by the independent traffic consultant. Based on actual data, traffic volume has increased by 11% from 5,913,940 in 2005 to 6,564,926 in 2006. Traffic volume is anticipated to grow in subsequent years arising from potential development in the catchment area.

In a recent announcement, Zecon has proposed to sell its entire equity interest in ZTC to Halifax Capital Bhd (“Halifax”) for RM42.0 million to be satisfied by the issuance of 420,000,000 new ordinary shares of RM0.10 each in Halifax. Zecon will maintain control in ZTC through an approximate 90% shareholding of Halifax upon the completion of the proposed divestment exercise. The proposed exercise is viewed as neutral to the rating as Zecon will remain the ultimate majority shareholder.

In FY2006, ZTC made a pre-tax profit of RM0.88 million as compared to losses recorded in the prior years. Prior year losses were attributed to financing costs of approximately RM4.0 million each year. The increase in FY2006 profit and profit margin was contributed by the increase in revenue due to traffic growth. ZTC has deferred its 10% toll hike originally scheduled to take effect in October 2007 to possibly some time in 2008. MARC is of the view that the delay in toll hike will not have an adverse impact on near-term expected cash flows and debt service coverage. Under the concession agreement, approval from Government of Sarawak is only required for toll rate revisions every 3 years of more than 10%, hence, giving ZTC favourable toll pricing flexibility. Cash flow from operations net of tax (“CFO”) improved in FY2006 to RM4.18 million from RM1.56 million in FY2005. ZTC was in compliance with its financial ratios in FY2006. Its Financial Service Cover Ratio (“FSCR”) for FY2006 was 1.84 times which is above the covenanted level of 1.25 times while its debt-to-equity ratio as at end FY2006 was at 0.87 times, below the covenanted level of 2.0 under the issue structure.