MARC has affirmed its AA-_IS  rating on Cerah Sama Sdn Bhd’s RM420.0 million Sukuk, with a stable outlook. Cerah Sama is the investment holding company of Grand Saga Sdn Bhd, the concessionaire of the 11.5-km Cheras-Kajang Highway. 

The rating affirmation is premised on the company’s resilient cash flows and stable revenue base, underpinned by steady traffic performance on the mature Cheras-Kajang Highway. The rating is further supported by the company’s strong cash reserves and the accommodative sukuk repayment structure. Cerah Sama’s leveraged capital structure constrains the rating. 

The stable rating outlook reflects MARC’s assessment that Cerah Sama will be able to generate sufficient cash flow and maintain healthy cash levels to meet its financial obligations. It also reflects MARC’s expectation that Cerah Sama will exercise discipline with regard to its dividend distribution and ensure its liquidity and leverage metrics are not compromised. 

Average daily traffic (ADT) on the highway continues its moderate growth, registering an increase of 1.7% in 2019 to reach 148,161 vehicles (at Batu 9 and Batu 11 toll plazas combined), in line with projections. Toll revenue (comprising actual toll collection and apportionment of past compensations received) grew 2.8% y-o-y to RM89.4 million in FY2019, achieved through continued moderate growth in traffic volume. Cash flow from operations (CFO) also improved 5.5% in FY2019 over the previous corresponding period to RM54.5 million. The company recorded RM118.9 million in cash and cash equivalents, including RM45.4 million in designated accounts as at December 31, 2019. This should be sufficient to meet the sukuk’s RM10.5 million profit obligations due on July 30, 2020 and RM40.5 million principal and profit obligations due on January 29, 2021. 

For a matured highway asset, Cerah Sama’s leverage remains moderately high with a debt-to-equity (DE) ratio of 4.2x as at end-2019 (2018: 4.0x). This is largely due to sizeable dividend payments.

Under the base case forecasts, minimum and average pre-distribution financial service cover ratios (FSCR) with cash balance are projected at 2.4x and 3.0x over the period 2020 – 2030, well above the covenanted FSCR of 1.75x. In MARC’s sensitised case, the base 2019 traffic has been adjusted to reflect current traffic flow at both toll plazas while annual traffic growth has been kept at 2.5% (zero in periods of toll hikes) based  on the actual traffic performance  of Cheras-Kajang Highway  over the past five years. Under this scenario, minimum FSCR is projected to stay above the covenanted 1.75x, albeit narrower at about 2.3x compared to 2.4x under the base case assumptions. Incorporating a one-year delay in scheduled toll hikes in 2020 and 2025, and a one-year delay in the payment of toll compensation, the impact on FSCR would be minimal. A scenario of a flat toll rate throughout the sukuk tenure and a one-year delay in the payment of toll compensation, however, could have a more significant impact on the FSCR. Prudent dividend upstreaming becomes increasingly important in this regard.