UEM EDGENTA BERHAD - 2018

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 ratings outlook is stable .

UEM Edgenta is majority owned by UEM Group Berhad, a wholly-owned subsidiary of Khazanah Nasional Berhad 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 which are underpinned by long-term concessions and contracts. The ratings are supported by higher earnings and cash flow from operations (CFO) as well as a sharp decline in borrowings, resulting in improved interest cover and leverage ratios.

UEM Edgenta continues to derive a steady income stream from long-term government concessions and commercial contracts for healthcare services, which accounted for 45.1% and 44.4% of revenue of RM2,182.6 million and pre-tax profit of RM198.5 million in 2018. Its wholly-owned subsidiary Edgenta Mediserve Sdn Bhd provides hospital support services (HSS) to government hospitals and healthcare institutions domestically and currently holds a 10-year concession ending in 2025. MARC views the risk of non-extension of the concession as low given the group’s expertise in HSS gained from a longstanding track record serving government hospitals since 1996. Through its 97.5%-owned UEMS Pte Ltd (UEMS), which provides commercial healthcare services to over 90 hospitals mainly in Singapore and Taiwan as well as to a few in Malaysia, UEM Edgenta has been able to geographically diversify its services. UEMS accounts for about 50% of the revenue generated by the healthcare services segment.

Its road building and maintenance works, undertaken by wholly-owned subsidiary Edgenta PROPEL Berhad, accounted for 40.4% and 44.6% of revenue and pre-tax profit in 2018. Primarily undertaken for related company Projek Lebuhraya Usahasama Berhad (PLUS) which is the country’s largest toll road concessionaire, the highway maintenance services contract has a long tenure ending in 2038. Apart from PLUS, revenue contribution to the group is supported by maintenance works carried out for state and federal roads as well as highways which include Selangor state roads and East Coast Expressway Phase 2. UEM Edgenta’s third business segment, property and facility solutions, has remained relatively small in terms of revenue generation but has seen significant growth with revenue increasing by 19.1% during the period after securing new contracts.

For 2018, UEM Edgenta’s consolidated revenue increased 3.3% y-o-y to around RM2.2 billion while pre-tax profit rose by 14.8% y-o-y to RM198.5 million. CFO improved y-o-y to RM232.3 million as the group collected the bulk of receivables from the government for its HSS operations.

Total borrowings stood at RM532.5 million of which short-term borrowings of RM124.5 million is manageable; UEM Edgenta’s unencumbered cash balance of RM462.8 million as at end-December 2018 affords strong financial flexibility.

There was no major capex incurred in 2018, with the debt-to-equity (DE) ratio standing at 0.35x while CFO interest cover was 8.8x. MARC notes that a special dividend of RM149.7 million was paid out in 2018 from proceeds of a subsidiary disposal in 2017. Its dividend policy, which has been revised to between 50% and 80% of net profit, offers some flexibility.

The stable outlook incorporates MARC’s expectation 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 negatively affect its credit profile could result in downward rating pressures.

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.