Maju Expressway Sdn Bhd - 2011

MARC has affirmed its AA-ID rating on highway concessionaire Maju Expressway Sdn Bhd’s (MESB) RM550.0 million Islamic Medium Term Notes (IMTN) Issuance Programme under the Shariah principle of Musyarakah. The rating outlook is stable. Factors that continue to support the rating are improved toll revenue arising from satisfactory traffic growth and a favourable amortisation profile with no debt maturities until 2015. The rating is moderated by the potential demands on liquidity posed by highway expansion plans and the downside risk of lower-than-projected longer term traffic growth.

MESB is the owner and operator of the concession asset Maju Expressway (MEX), a 26km open-toll highway connecting the Kuala Lumpur city centre area to Putrajaya which serves five major townships south of Kuala Lumpur. Since MARC’s initial rating in 2010, MEX has continued to exhibit strong month-on-month growth in average daily traffic (ADT). Actual ADT of 78,962 vehicles/day exceeded projections by 8% in 2010. For the first six months of 2011, ADT grew 15.8% compared to the prior year corresponding period and will likely maintain its double-digit growth trajectory in the near term, aided by development and growth in its catchment areas. MESB’s revenue forecast for 2010 was exceeded by a modest margin of 7.5% at RM54.6 million. MESB has completed a feasibility study on the extension of the MEX from Putrajaya to the Kuala Lumpur International Airport (KLIA) and submitted its proposal to the government. The company also made payments totaling RM54.1 million in respect of preliminary expenses and refundable deposits on the extension. A decision by the government to undertake the extension is expected by end-2011.

The cash payments for the extension of the MEX contributed to the decline in its cash flow from operations to negative RM49.4 million (2009: +RM30.2 million). MARC understands that deposits amounting to RM49.15 million will be refunded in the event no agreement is concluded between the government and MESB with respect to the extension. While MESB’s debt repayment schedule (amortisation begins in 2015) accommodates early cash flow shortfalls against projections in initial years of the financing, this reduces the company’s cash buffer and increases MESB’s reliance on future traffic growth to meet its debt servicing requirements.

Despite the improved toll revenue, MESB recorded a pre-tax loss of RM3.3 million in 2010 (2009: pre-tax loss of RM42.4 million) as higher traffic volumes resulted in larger operations and maintenance costs as well as higher amortisation of its highway development expenditure. Additionally, the expiry of its defects liability period on December 31, 2009 also contributed to the higher maintenance costs. The operating losses have reduced MESB’s shareholders’ funds to negative RM0.4 million; however, based on the trust deed’s calculation which includes a government grant of RM976.7 million as part of shareholders’ equity, MESB remains in compliance with its gearing covenant with a debt-to-equity ratio of 0.55 times as at 2010 (2009: 0.34 times).

The stable outlook incorporates MARC’s expectations that MESB will not incur further significant non-budgeted cash outflow and will maintain enough liquidity to avoid further downward pressure on its rating.

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