CERAH SAMA SDN BHD - 2017

MARC has affirmed its rating of AA-_IS on Cerah Sama Sdn Bhd’s (Cerah Sama) RM420.0 million sukuk with a stable outlook.

Cerah Sama is the investment holding company of Grand Saga Sdn Bhd (Grand Saga), the concessionaire of the 11.5-kilometre Cheras-Kajang highway that serves as a key commuting link for mature catchment areas along the highway. The affirmed rating primarily reflects Cerah Sama’s adequate cash flows generated by steady traffic flow on the highway. The rating also factors in the sufficient liquidity reserves and manageable sukuk repayment under the structure. Moderating the rating is the potential impact on traffic volume on the highway from the impending operations of the Klang Valley Mass Rapid Transit (KVMRT) Line 1 and Cerah Sama’s high leverage position with its debt-to-equity (DE) ratio standing at 4.13 times at end-10M2016.

For 10M2016, the Cheras-Kajang highway’s average daily traffic volume declined marginally to 135,230 vehicles attributed to the toll rate hike in October 2015 (10M2015: 135,828 vehicles). Given that the KVMRT Line 1 is expected to commence full operations in 2H2017, the highway’s traffic forecast has been further revised downward with a one-time traffic decrease of 6.0% and 4.5% at the Batu 9 and Batu 11 toll plazas respectively in 2017. MARC views the revision to be fair; nonetheless, the annualised projected growth rates for the period between 2018 and 2030 of 3.0% and 3.5% for the Batu 9 and Batu 11 toll plazas respectively are deemed moderately optimistic considering the highway’s maturity and historical growth profile.

The revised base case projections show minimum and average pre-distribution financial service cover ratio (FSCR) with cash balance of 2.10 times and 3.91 times respectively throughout the sukuk tenure. In MARC’s sensitivity analysis, Cerah Sama demonstrates a moderate-to-high degree of resilience with respect to the FSCR and is able to withstand up to a 15% decrease in the overall projected traffic volume before breaching the FSCR covenant of 1.75 times. MARC also considers the risk of severe traffic underperformance in the near term to be remote, based on the highway’s operational track record and limited capacity on competing roads during peak hour. Over the medium term, the rating agency views the Cheras-Kajang highway’s ability to achieve the projected volume as crucial to maintain its credit metrics that are commensurate with the current rating band, particularly as the average annual finance service obligations of RM51 million commences in 2020.

For 10M2016, Cerah Sama’s unaudited revenue and pre-tax profit increased by 56.3% and 88.2% to RM78.6 million and RM31.3 million mainly attributed to toll rate hikes. Cash flow from operations rose 83.7% to RM51.8 million on the back of higher toll collections and lower working capital requirements while net cash flow narrowed to negative RM0.5 million on lower dividend payouts of RM33.2 million (10M2015: RM28.2 million; negative RM92.6 million; RM163.0 million). MARC expects Cerah Sama to manage its dividend payout policy to adhere to its DE covenant of 4.50 times. Cerah Sama is indirectly held by Bursa Malaysia-listed Taliworks Corporation Berhad (51%) and the Employees Provident Fund (EPF) (49%).

The stable outlook incorporates MARC’s expectation of satisfactory traffic performance on the Cheras-Kajang highway and the continuity in Cerah Sama’s prudent financial management. Downward rating pressure may emerge if Cerah Sama’s credit profile changes materially due to sizeable business acquisitions and/or sustained traffic underperformance.

Major Rating Factors

Strengths

• Strategic alignment supports traffic flow;
• Minimal operation risk; and
• Undemanding repayment schedule.

Challenges/ Risks

• Risk of traffic contraction from the impact of MRT operations;
• Weakening leverage position; and
• Potential acquisitions may shift credit profile.