PROJEK LEBUHRAYA USAHASAMA BERHAD - 2017

MARC has affirmed its AAA_IS rating on Projek Lebuhraya Usahasama Berhad's (PLUS) RM23.35 billion Sukuk Musharakah Programme (sukuk) with a stable outlook. PLUS is the toll concessionaire of five major highways in Malaysia, of which the 772-kilometre (km) North-South Expressway (NSE) is its key highway in terms of revenue generation.

The rating affirmation continues to incorporate a two-notch rating uplift from PLUS’ standalone rating of AA on the basis of support assumption from the Malaysian government with respect to the sukuk. Among the key factors supporting this assumption are the interdependence between default events for the rated sukuk and the RM11.0 billion government-guaranteed sukuk (GG Sukuk) maturing after the rated programme. In addition, MARC considers the government’s golden share and indirect major shareholding in PLUS as well as the critical role of NSE in the country’s transportation system as factors underpinning the rating uplift. PLUS is jointly owned by UEM Group Berhad, a wholly-owned subsidiary of Khazanah Nasional Berhad, and the Employees’ Provident Fund.

PLUS’ standalone rating reflects its satisfactory cash flow coverages on the back of stable traffic performance of its portfolio of matured highways comprising New Klang Valley Expressway (NKVE), NSE, North-South Expressway Central Link (NSECL), Malaysia-Singapore Second Link (MSSL), Butterworth-Kulim Expressway (BKE) and the Penang Bridge. The standalone rating is, however, constrained by the concessionaire’s further deterioration in its gearing arising from aggressive dividend distributions on its redeemable convertible unsecured loan stock (RCULS). In addition, the potential impact on PLUS’ overall traffic volume resulting from new competing highways and alternative modes of public transportation would weigh on its credit profile.

PLUS’ overall traffic volume for 9M2017 is within MARC’s expectations. Traffic growth on NSE has plateaued after a period of commendable growth while NKVE’s growth reflects the congestion build-up arising from additional peak-period trips. Traffic volume on MSSL registered a growth of 6.9% during the period, largely on the back of ongoing developments surrounding Nusajaya and improved connectivity to west Johor Bahru via Gelang Patah, while NSECL grew by 5.2% y-o-y despite greater acceptance towards public transportation. In the northern region, both Penang Bridge and BKE’s traffic growth remained subdued in light of these highways’ mature traffic profile.

For 9M2017, PLUS' operational revenue declined to RM2.79 billion attributed to recognition of lower government compensation amounting to RM61.9 million. Consequently, PLUS’ net operating cash flow (CFO) decreased by 0.8% y-o-y to RM1.97 billion translating to a CFO interest coverage of 1.29 times in 9M2017. PLUS’ debt repayment ability remains adequate to cover its current annual financing obligations of RM1.53 billion. During the period under review, the substantial amount of coupon payment on its RCULS coupled with large accumulated losses have resulted in a higher debt-to-equity (DE) ratio. As at September 30, 2017, PLUS’ DE ratio stood at 74.9 times (9M2016: 26.1 times) vis-à-vis shareholders’ funds of RM405.8 million.

Under the base case scenario, PLUS’ financing coverage is projected to remain commensurate with its standalone rating level, registering minimum and average pre-distribution financial service coverage ratio (FSCR) of 2.87 times and 7.03 times. Sensitivity analysis shows the concessionaire's susceptibility to traffic growth decline on NSE compared to deferrals in toll rate increases and the absence of government compensation throughout the sukuk tenure. In MARC's view, the recent toll abolishment at Batu Tiga-Sungai Rasau and Bukit Kayu Hitam tolls which commenced in January 2018, is unlikely to impact PLUS as both these toll plazas only contributed about 2.73% to PLUS expressways’ tolling revenue, before taking into account the corresponding cost savings from the elimination of operations and maintenance.

The stable outlook is premised on MARC’s expectations that the concession assets of PLUS will continue to achieve satisfactory traffic performance in line with projections and the company’s credit metrics will remain commensurate with its standalone rating. Downward rating pressure on the standalone rating may emerge if the concessionaire’s cash buffer erodes over time as a result of declining traffic growth rates.

Major Rating Factors

Strengths

• Portfolio of matured toll road concessions with stable traffic profiles;
• Government support to the transaction, and;
• Stature of shareholders.

Challenges/Risks

• Highly leveraged transaction structure;
• Threats from upcoming alternative toll roads and rail networks, and;
• Inherent regulatory risks.