UEM EDGENTA BERHAD - 2017

MARC has affirmed its ratings of MARC-1_IS /AA-_IS on UEM Edgenta Berhad’s Islamic Commercial Papers (ICP) and Islamic Medium-Term Notes (IMTN) under its Sukuk Murabahah programme of up to RM1.0 billion. The outlook on the ratings is stable.

UEM Edgenta is majority-owned by UEM Group Berhad, a government-linked entity with significant business interests in key economic sectors. The affirmed ratings primarily reflect UEM Edgenta’s strong business profile as a longstanding provider of hospital support and highway maintenance services. These businesses are undertaken through long-term agreements and generate steady income. The long-term rating is also underpinned by MARC’s assessment of parental support from UEM Group. The key moderating factor is the periodically high working capital requirement that has weighed on operating cash flow.

UEM Edgenta’s recent disposal of its 61.2% subsidiary Opus International Consultants Ltd (OIC), a New Zealand-based company involved in asset consultancy, has strengthened the group’s credit metrics. OIC has faced tough operating conditions, mainly in the energy sector, which had impacted UEM Edgenta’s financial performance in recent years. Part of the disposal proceeds of RM463.0 million was used to pare down borrowings, reducing group consolidated leverage to 0.35 times at end-2017 from 0.64 times as at end-2016. Following the disposal, UEM Edgenta’s asset consultancy segment is now spearheaded by its wholly-owned and domestically incorporated subsidiary Opus Group Berhad, which currently undertakes consultation services on public and private infrastructure projects.

UEM Edgenta’s healthcare segment provides hospital support services to 32 government hospitals in northern Peninsular Malaysia through a 10-year government concession agreement ending in 2025 as well as hospital support services to the National Cancer Institute. MARC deems termination risk as low given the group’s longstanding track record in the field. The group has further strengthened its position in this segment following the recent acquisition of Singapore-based UEMS Pte. Ltd. (UEMS), which also provides hospital support services to 90 hospitals and healthcare institutions in Singapore, Malaysia and Taiwan. The acquisition diversifies geographic risk with UEMS accounting for about half of the group’s healthcare services revenue of RM912.3 million in 2017.

Its highway maintenance services are undertaken through a long-term master maintenance agreement ending in 2038 with related company Projek Lebuhraya Usahasama Berhad (PLUS) which owns a portfolio of toll road concessions in Peninsular Malaysia. MARC views the payment risk from PLUS as minimal given its very strong capacity to meet its contracted obligations. Aside from the PLUS contract, the group does maintenance works for Selangor state roads, the Lebuhraya Pantai Timur 2 Sdn Bhd’s East Coast Expressway and, abroad, for the Cikampek-Palimanan toll road in West Java, Indonesia. In total, its highway maintenance services cover 2,500km of highways and roads.

For 2017, UEM Edgenta recorded lower pre-tax profit of RM172.9 million (2016: RM181.5 million) largely due to an increase in interest charges on borrowings incurred to acquire UEMS in 4Q2016 as well as an increase in amortisation of intangible assets. Interest charges going forward would ease as the group’s borrowings have reduced to RM559.8 million at end-2017 from RM989.7 million at end-2016.

MARC is of the view that the loss of earnings from the disposal of OIC would be offset by stable earnings from UEMS as well as organic growth and expected margin improvements across UEM Edgenta's key businesses. MARC views the dividend income from key subsidiaries in hospital support and highway maintenance services as stable and sufficient to meet the holding company’s financial obligations on its borrowings of RM301.7 million, including the outstanding RM50 million ICP and RM250 million IMTN under the rated programme as at end-March 2018.

The stable outlook incorporates MARC’s expectations that UEM Edgenta would maintain credit metrics that are commensurate with the current rating band. However, a sharp increase in leverage and/or significant changes in the non-concession business that would affect its credit profile could result in downward rating pressure.

Major Rating Factors

Strengths

• Longstanding operating track record in hospital support services and highway maintenance; and
• Stable income from concession operations.

Challenges/Risks

• Managing working capital requirements; and
• Concession termination risk.