SENAI-DESARU EXPRESSWAY BERHAD - 2017

MARC has affirmed its BBB-_IS rating on Senai-Desaru Expressway Berhad’s (SDEB) RM1.89 billion Islamic Medium-Term Notes (MTN) Programme (sukuk programme) with a stable outlook. SDEB is the concessionaire of a 77km tolled inter-urban expressway (E22) between Senai and Desaru with a connecting highway to Pasir Gudang.

The affirmed rating incorporates SDEB’s improved cash flow generation on the back of better-than-expected traffic performance and the accommodative debt repayment schedule with step-up profit rates under the programme which alleviates liquidity pressure in the early period of the sukuk tenure. SDEB’s significant reliance on planned developments for traffic growth prospects and weak financial leverage metrics remain as key constraints to the rating.

For the first eight months of the financial year ended June 30, 2017 (8MFY2017), traffic volume on the E22 grew 17.0% to 241.8 million passenger car unit-kilometres (pcu-km). The growth was mainly driven by the higher number of commercial vehicles (Class 2 and Class 3 vehicles) travelling through the Penawar toll plaza because of increased development activities at the Pengerang Integrated Petroleum Complex (PIPC). Traffic performance was also supported by a 14.8% y-o-y growth in Class 1 vehicles which contributed about 78.4% of the total volume (in pcu-km) for 8MFY2017. The traffic growth momentum would need to be maintained, with at least an average growth of 7.8% per annum between 2018 and 2027, to be able to support SDEB’s finance service obligations. MARC views the planned developments along the expressway and further investments at PIPC as key factors to sustain traffic growth. The existing investment at the PIPC is the RM60 billion Refinery and Petrochemical Integrated Development (RAPID) project by PETRONAS, where the first phase is scheduled to commence commercial operations in 2019.

For 8MFY2017, SDEB’s revenue grew 26.8% to RM47.8 million in line with the traffic improvement. However, profitability remained weak, as evidenced by continued pre-tax losses; for 8MFY2017, it recorded pre-tax losses of RM82.9 million (8MFY2016: negative RM96.1 million). Consequently, the accumulated losses as at February 28, 2017 widened to RM1,089.0 million from RM955.5 million in the last corresponding period. Cash flow from operations (CFO) rose twofold to RM20.9 million, attributed to higher toll collections and lower cash outflow for highway maintenance and asset replacement. This, coupled with the minimal financing obligations, increased SDEB’s cash and bank balances to RM40.9 million as at February 28, 2017 (June 30, 2016: RM26.2 million).

SDEB’s scheduled toll rate hike on January 1, 2017 has yet to be implemented. MARC views the timing of compensations from the government as crucial to preserve project coverage, particularly from 2018 when the profit rate step ups to 1.3% from 0.5%. Based on the latest cash flow projections which assume timely receipt of toll compensations, SDEB is expected to record an average pre-distribution finance service cover ratio (FSCR) of 2.66 times throughout the sukuk tenure. Despite a better-than-expected cash position arising from improved traffic performance, commencement of the first mandatory early repayment remains in FY2022 as SDEB is expected to allocate the additional liquidity reserve for highway maintenance and repair.

In respect of the upgrading work schedule under Appendix R of the concession agreement (CA), SDEB has been granted a deferment by the government. However, the government has requested SDEB to upgrade the portion between Cahaya Baru and Penawar earlier than the agreed date (part of the schedule under Appendix R). Funding for the lane widening is expected to be borne by the government with the repayment profile expected to mirror the capex spending schedule between FY2032 and FY2036 under the financial projections. MARC expects SDEB to seek a further time extension from the sukukholders if the proposal is not finalised by December 31, 2017.

The stable outlook reflects MARC’s expectations that SDEB will achieve sustainable traffic performance and maintain a liquidity buffer that is in line with projections. Any revision to the rating and/or outlook would depend on the outcome of deferment on the upgrading works or any material deviations from the assumptions set out in the projections.

Major Rating Factors

Strengths

• Structural protection for sukukholders; and
• Debt repayment schedule eases liquidity pressures in the early years of the tenure.

Challenges/Risks

• Weak financial leverage;
• Future traffic volume growth remains reliant on proposed developments along the highway; and
• Reliance on timely receipts of government compensation.