CREDIT ANALYSIS REPORT

SENAI-DESARU EXPRESSWAY BERHAD - 2020

Report ID 60510 Popularity 586 views 36 downloads 
Report Date May 2020 Product  
Company / Issuer Senai-Desaru Expressway Berhad Sector Infrastructure & Utilities - Toll Road
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Rationale
MARC has affirmed its BBB-IS rating on Senai-Desaru Expressway Berhad’s (SDEB) RM1.89 billion Islamic Medium-Term Notes (Restructured Sukuk) Programme with a stable outlook. SDEB is the concessionaire of the 77-km tolled inter-urban Senai-Desaru Expressway (SDE) in Johor, which links the towns of Senai and Desaru with a connecting highway to Pasir Gudang.

The rating considers the accommodative amortisation schedule put in place under the programme. The back-ended financing structure — with first principal repayment due in 2038 — and the step-up profit feature would provide some headroom for SDEB to build up sufficient cash, strengthen its liquidity position and maintain compliance with the covenanted finance service cover ratio (FSCR) of 1.25x. 

SDEB’s liquidity position is adequate at present, supported by RM71.8 million of cash and cash equivalents as at end-February 2020, sufficient to meet its profit/interest obligations totalling RM26.9 million in 2020 and RM27.9 million in 2021.

Against the backdrop of the coronavirus disease (COVID-19) and potential liquidity challenges, we have assessed SDEB’s capital and liquidity position over the short to medium term. Our sensitivity analysis reveals that:

  • With current cash reserves of RM71.8 million and assuming normal business operations in 2021 (i.e. revenue of around RM78 million), SDEB could withstand a decline in revenue of around 80% y-o-y in 2020 without breaching its covenanted FSCR of 1.25x for both 2020 and 2021.

  • However, should revenue drop by 80% in 2020 and assuming normal business operations in 2021, revenue in 2022 would have to grow by almost 55% from 2019’s actual revenue to meet the FSCR covenant. This is largely because of the higher financial obligations due in the year (sukuk step-up feature; refer to Exhibit 18). Even assuming that there is no impact to business from COVID-19 for 2020/2021, minimum growth required for 2022 is still about 15%. Scheduled toll hikes, or timely compensation from the Government of Malaysia (GOM) in the event of toll hike deferrals are, therefore, crucial to SDEB’s debt service ability. In this regard, SDEB’s rating is primarily sensitive to its ability to show solid top-line growth that requires a significant expansion in traffic volume and/or a firm increase in toll rates over the next 12–18 months. Inability to demonstrate so will be a credit risk and will exert downward pressure on the rating and/or outlook.

The rating is, however, constrained by the lack of catchment areas along key stretches of SDE that limits traffic growth prospects and the heavy reliance on planned developments to spur traffic growth on the highway. The rating is also tempered by SDEB’s weak leverage metrics due to heavy financial costs and the resultant losses.

Traffic volume measured in passenger car unit per kilometer (pcu-km) had performed better than anticipated in 2019 with 12.25 million total transactions, beating forecast by 3.4%. However, 2019 figures were below 2018’s figures, as expected, given lower industrial/heavy vehicle transactions (Class 2 and Class 3 vehicles) with completion of the Refinery and Petrochemical Integrated Development (RAPID) and Pengerang Integrated Petroleum Complex (PIPC) projects last year. Average daily traffic (ADT) was lower by 6.5% in 2019 at 33,550 pcu-km/day against 35,897 pcu-km/day in 2018. 

SDEB posted total revenue of RM78.1 million in fiscal 2019, essentially flat from a year earlier. However, it reported an uptick in operating margin to 34.5% for FY2019, helped by reduced costs. FY2019 pre-tax losses, nevertheless, widened to RM146.3 million on higher finance costs that had increased by 5.3% y-o-y to RM173.3 million. This was largely due to the higher profit rate of 1.3% imposed on the Restructured Sukuk; the Restructured Sukuk is a step-up facility with lower initial profit rate that rises at defined intervals. MARC highlights, however, that a large proportion of the financing costs relates to Irredeemable Convertible Unsecured Loan Stock (ICULS) that are non-cash in nature. Under the Restructured Sukuk Programme, there will be no distribution to ICULS holders until the Restructured Sukuk is completely redeemed and the company’s RM150 million term loan is fully settled. Actual finance charges paid out in fiscal 2019 summed up to RM24.6 million.  

Cash flow from operations (CFO) in FY2019 declined to RM28.5 million on higher outlay for regular highway maintenance and asset replacement. Coupled with the higher profit payment on the Restructured Sukuk, this has resulted in a lower CFO interest coverage ratio of 1.16x in FY2019 before improving to 1.57x in the eight-month period to February 2020. Given the economic uncertainty induced by COVID-19 and with the expressway being relatively susceptible to fluctuations in recreational travel, MARC views the cushion as modest; any deterioration in traffic performance will hamper SDEB’s cash flow coverage.

Major Rating Factors

Strengths
Structural protection for sukukholders; and
Accommodative debt repayment schedule in initial years. 

Challenges/Risks
Weak financial leverage; and
Limited growth prospects that are heavily reliant on planned developments along the highway.


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