Cerah Sama Sdn Bhd - 2013

MARC assigns a rating of AA-IS to Cerah Sama Sdn Bhd’s (Cerah Sama) proposed first issuance of RM420.0 million sukuk under its RM750.0 million Sukuk Musharakah Programme with a stable outlook.

The rating on the sukuk derives from MARC’s assessment of the underlying economic strength of the Cheras-Kajang Highway operated by Cerah Sama’s key and only material operating subsidiary, Grand Saga Sdn Bhd (Grand Saga). The rating recognises that the discretionary cash flow generated by the highway will be the primary funding source for obligations on the initial RM420.0 million sukuk issuance. In MARC’s analysis of the priority of claims to Grand Saga’s cash flows, the rating agency notes that there is no other debt at the consolidated level other than Cerah Sama’s outstanding senior debt which will be refinanced by the sukuk issuance. Additionally, the sukuk’s prohibition on incurring additional indebtedness with recourse to Cerah Sama or its existing subsidiaries should protect sukukholders from the risk of structural subordination going forward. Accordingly, the rating is primarily driven by MARC’s assessment of Cerah Sama’s ability to service the RM420.0 million sukuk from Grand Saga’s operational cash flows. The current rating does not factor in any additional debt-financed acquisitions of additional brownfield toll roads in Malaysia and/or the ASEAN region that may be funded by the remaining RM330.0 million of availability under the Sukuk Musharakah Programme in accordance to Cerah Sama’s mandate from its majority shareholders, Taliworks Corporation Berhad (Taliworks) and The South East Asian Strategic Assets Fund L.P. (SEASAF).

Providing key support for the rating of the RM420.0 million sukuk is the matured traffic profile of the Cheras-Kajang Highway, the strong debt service coverage of over 2.50 times and the low sensitivity of projected finance service cover ratios (FSCRs) to conditions of flat to moderate traffic growth. The rating is moderated by Cerah Sama’s dependence on toll rate hikes to sustain high overall debt service coverage levels through 2033 and the potential impact of the Klang Valley Mass Rapid Transit (MRT) on highway traffic volume beyond 2017.

Cerah Sama is the investment holding company of Grand Saga Sdn Bhd (Grand Saga), the concession holder of the 11.5km Cheras-Kajang Highway. The operations and maintenance of the highway are conducted through Cerah Sama’s wholly-owned group of companies. Dividends from Grand Saga would form the primary source of the Sukuk repayments.

Changes to the concession on March 2, 2012 saw the conversion of the Batu 9 and Batu 11 toll plazas to one-direction toll plazas which effectively halved the highway’s tolled traffic volume and extension of the concession period by 15 years. These changes to the concession have necessitated the refinancing of Cerah Sama’s current outstanding senior debt of RM380.0 million. The proposed sukuk issuance will allow Cerah Sama to extend the maturity profile of its debt and align the concession’s cash flows with its liabilities, with the balance for working capital purposes. Tolled traffic volume in the ten-month period ending October 31, 2012 (10M2012) had fallen to 151,687 vehicles/day compared to 233,322 vehicles/day in the full preceding year (2011) subsequent to the changes to the concession. Traffic volume is expected to be impacted further into 2013 as the full year’s impact of the changes is felt. Based on the traffic study by traffic consultant, Perunding Trafik Klasik Sdn Bhd (PTK), traffic on the highway will grow at a compound annual growth rate of 3.2% per annum until 2030. Although the traffic consultant has projected a marginal decline in traffic volume of 5.3% in 2017 upon commencement of the Sungai Buloh-Kajang MRT in 2016, MARC’s sensitivity analyses on Cerah Sama’s cash flow projections reveal that it should be able to withstand a larger decline in traffic volume.

For the financial year ending December 31, 2011 (2011), Cerah Sama reported consolidated revenue and pre-tax profit of RM100.4 million and RM36.2 million (2010: RM89.9 million; RM34.2 million) while cash flow from operations of RM56.5 million (2010: RM56.4 million) was sufficient to provide interest coverage of 2.57 times (2010: 2.57 times). Cerah Sama’s cash balances of RM112.1 million as at 10M2012, which includes RM60.0 million of the RM120.6 million cash compensation received from the government, will provide a comfortable buffer against any near-term disruptions in traffic volume. Upon the issuance of the RM420.0 million sukuk, Cerah Sama’s pro forma debt-to-equity would increase to 2.51 times from 2.27 times as at end-October 2012. Cerah Sama is expected to maintain a comfortable minimum and average pre-dividend finance service cover ratio (FSCR) of 2.99 times and 5.71 times throughout the tenure of the Sukuk Programme. That said, MARC is mindful that Cerah Sama’s ability to retain a comfortable liquidity buffer will be subject to its dividend policy and planned dividend distributions between 2013 and 2020.

The stable outlook incorporates MARC’s expectations that the political and regulatory environment would remain relatively benign and supportive to future toll hikes. Also, MARC expects any future acquisition by Cerah Sama to be earnings accretive to sustain its debt servicing ability. The ratings or outlook could come under negative pressure if Cerah Sama’s credit profile changes materially as a result of a sizeable business acquisition.

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