SISTEM PENYURAIAN TRAFIK KL BARAT SDN BHD - 2017

MARC has affirmed its A+_IS rating on Sistem Penyuraian Trafik KL Barat Sdn Bhd’s (SPRINT) Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS). Concurrently, MARC has revised the rating outlook to stable from negative.

SPRINT is the toll concessionaire of the 26.5-km interlinked SPRINT highway comprising Damansara Link, Kerinchi Link and Penchala Link in Kuala Lumpur. The rating affirmation incorporates SPRINT’s adequate cash flow coverage arising from its relatively mature traffic profile and ample cash reserves. The outlook revision considers SPRINT’s manageable upcoming financing obligations until the maturity of the BaIDS. The rating is moderated by the traffic underperformance of two of its major revenue contributors, Penchala Link and Kerinchi Link, and a highly leveraged capital structure.

In 10M2017, Damansara Link grew by 6.9% y-o-y (10M2016: negative 8.7%) while Kerinchi Link and Penchala Link continued to decline albeit at a slower pace to 6.2% and 4.1% (10M2016: negative 10.0%; negative 12.8%). The average daily traffic (ADT) during 10M2017 on Damansara Link, Kerinchi Link and Penchala Link were 54,788 vehicles, 81,212 vehicles and 68,225 vehicles. Of these, only Damansara Link has surpassed the latest projections while Kerinchi Link and Penchala Link are 9.4% and 4.9% below 2017’s full year ADT projections. For financial year ended March 31, 2017 (FY2017), Penchala Link and Kerinchi Link continued to be the largest revenue contributor to SPRINT in light of the highways’ higher toll rates compared to Damansara Link (FY2017 tolling revenue contribution of 20%). SPRINT recorded higher tolling revenue by 17.3% y-o-y of RM191.6 million while toll compensation recognised was lower at RM40.0 million (FY2016: RM76.7 million) in line with the toll rate hike implementation in October 2015. The lower government compensation, coupled with an increase in amortisation charges, resulted in a pre-tax loss of RM8.3 million in FY2017.

Cash flow from operations (CFO) improved to RM219.8 million on the back of better working capital management. This notwithstanding, higher cash financing obligations in FY2017 led to lower CFO interest coverage of 3.37 times (FY2016: 4.99 times). As at October 31, 2017, SPRINT’s cash balances in its designated accounts (excluding the operating account) stood at RM354.3 million which is sufficient to meet its debt obligations of RM193.7 million in FY2019. Notwithstanding the ample liquidity coverage, the project’s aggressive capital structure and lackluster traffic performance on Kerinchi Link and Penchala Link continue to weigh on its performance. MARC also observes that traffic on both links have not returned to their pre-October 2015 ADT levels. As at end-March 2017, SPRINT’s debt-to-equity (DE) and facility DE ratio stood at 4.60 times and 1.34 times.

The base case traffic and revenue projections are derived from the latest April 2017 traffic study. In MARC’s view, the latest forecast is more reflective of the highways’ current traffic performance. The latest traffic forecast incorporated an 11% discount from the previous traffic forecasts supported by reasonable assumptions after considering the impact from the Klang Valley Mass Rapid Transit lines, new toll alternatives and future toll rate hikes. Based on MARC’s sensitivity analyses, SPRINT would remain in compliance with the minimum finance service cover ratio (FSCR) of 1.50 times should toll revenue on the Penchala Link and Kerinchi Link come in 20% lower than the base case revenue. However, the FSCR covenant would be breached if the revenue falls short of projections by more than 23%, a scenario which MARC deems to be unlikely.

The stable outlook assumes MARC’s expectations that SPRINT’s financial metrics will remain commensurate with its current rating, supported by sufficient cash flow generation despite its traffic performance trailing projections. The rating could be revised should changes in government policy impact the toll road concession.

Major Rating Factors

Strengths

• Adequate cash flow coverage from relatively mature highways;
• Financial flexibility on deferred debt service of government support loans; and
• Debt repayment ability supported by strong cash reserves.

Challenges/Risks

• Traffic underperformance from the interlinked tolled roads;
• Moderately high leveraged capital structure; and
• Competition from toll-free alternative routes and new highways.