SENAI-DESARU EXPRESSWAY BERHAD - 2018 Credit Commentary Report

Senai-Desaru Expressway Berhad’s (SDEB) sukuk rating has been on MARCWatch Developing since May 30, 2018. The placement follows the increased near-term uncertainty pending full clarity on the new government’s exact plans to deliver on its pre-election commitment of scrapping toll road charges. MARC will seek to resolve the MARCWatch Developing status once there is more clarity on the abolition of toll from the government. (Please see MARC announcement on toll roads dated May 30, 2018.)

SDEB is the concessionaire of a 77-kilometre tolled inter-urban expressway (E22) between Senai and Desaru with a connecting highway to Pasir Gudang. It has an outstanding RM1.89 billion under its Islamic Medium-Term Notes (Restructured Sukuk) Programme. During the first eight months of the financial year ended June 30, 2018 (8MFY2018), traffic volume improved, with traffic on the E22 growing by 7.4% to 259.8 million passenger car unit-kilometres (pcu-km). The main driver behind the growth was the increased development and construction activities at the Pengerang Integrated Petroleum Complex (PIPC) which includes the Refinery and Petrochemical Integrated Development (RAPID). As the expressway would need to register an average growth of 7.8% per annum between 2018 and 2027 to support SDEB’s finance service obligations, the fruition of planned developments along the expressway and continued investment at PIPC are deemed critical to sustain traffic growth.

During 8MFY2018, SDEB’s revenue grew by 7.5% y-o-y to RM51.4 million but continued to register pre-tax losses on the back of high finance cost of RM108.8 million (8MFY2017: RM103.1 million), which led to a widening of SDEB’s negative shareholders’ equity. Cash flow from operations (CFO) improved to RM27.1 million (8MFY2017: RM20.9 million), attributed to higher toll collections and lower cash outflow for highway maintenance and asset replacement. SDEB’s cash and bank balances stood higher at RM61.4 million as at February 28, 2018 (February 28, 2017: RM40.9 million). Based on the latest cash flow projections, SDEB is expected to record an average pre-distribution finance service cover ratio (FSCR) of 2.66 times throughout the tenure of the Restructured Sukuk.

Appendix R of the supplementary concession agreement (SCA) details the mandatory widening and upgrading works if the relevant segments meet the specified dates starting from 2020 or service requirements when single-lane carriageway level of service (LOS) drops below LOS ‘C’ and when dual two-lane exceeds 70,000 vehicles per day, whichever is earlier. Upon instruction by the previous administration, SDEB submitted a draft for the second SCA (SCA2) in October 2017. The SCA2 details: (i) the government’s proposal to bring forward the widening works of the Cahaya Baru-Penawar section earlier than 2031 (as per the earlier proposed amended Appendix R and the adopted cash base case financial model during the financial close of the restructured sukuk); (ii) construction of the new southbound directional ramp towards Federal Route 92; and (iii) the removal of Appendix R entirely. The proposed works were to be carried out by the Public Works Department with the government bearing the full construction cost. However, these have remained inconclusive with the change of administration. MARC will continue to monitor the status of the expansions and developments for any rating implications.