CREDIT ANALYSIS REPORT

PROJEK LEBUHRAYA USAHASAMA BERHAD - 2020

Report ID 605366 Popularity 948 views 216 downloads 
Report Date Dec 2020 Product  
Company / Issuer Projek Lebuhraya Usahasama Berhad Sector Infrastructure & Utilities - Toll Road
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Rationale
MARC has affirmed its AAAIS rating on Projek Lebuhraya Usahasama Berhad's (PLUS) RM23.35 billion Sukuk Musharakah Programme, concurrently removing the rating from MARCWatch Developing where it had been placed since January 24, 2020. The rating outlook is stable

The placement on MARCWatch developing was prompted by the uncertainties stemming from the government’s announcement to reduce PLUS’ toll rates by 18% effective February 1, 2020, on Class 1, Class 4 and Class 5 non-commercial vehicles plying PLUS’ highways, and maintain fixed toll rates throughout the concession period without any compensation. In lieu of these measures, the government is expected to carry out a toll restructuring exercise with PLUS involving the extension of PLUS’ concession agreement (CA) by 20 years to end-2058 from end-2038 currently. 

Negotiations with the government to address the implications of the aforementioned factors on PLUS’ financials under its current CA, and the interests of key stakeholders are still ongoing. In this regard, MARC views that any decision on the toll restructuring appears unlikely anytime soon given the government’s priority in addressing the economic uncertainties caused by the impact from the COVID-19 pandemic. 

MARC views that as long as the protracted negotiations between the government and the toll concessionaire remained unresolved, PLUS’ rights and benefits under the current CA remain intact, including entitlement to claim toll compensation for the 18% toll discount and the freeze on toll hikes. This view is underpinned by a letter issued by the Ministry of Finance (MOF) on January 31, 2020 to PLUS confirming that “until the toll restructuring is complete, the existing concession agreements and supplemental concession agreements will continue to subsist and remain in full force”. In view of this, MARC has removed the rating from its MARCWatch Developing placement and assessed PLUS’ credit profile in the context of its existing CA framework and debt structure. 

The affirmed rating reflects PLUS’ mature and stable traffic profile, which is supported by a low 2016-2019 peak-to-trough volume variance of only about 2%. The company’s network experienced a severe traffic declines during the Movement Control Order (MCO) between March and May 2020; however, traffic levels have recovered strongly in subsequent months after the easing of government travel restrictions. While it remains difficult to predict the course of the pandemic, MARC currently assumes the 2020 shock to be progressively recovered by 2022. 

The rating affirmation continues to incorporate a two-notch rating uplift from PLUS’ standalone rating of AA, which reflects MARC’s assessment of strong government linkages as demonstrated in the interdependence between default events for the rated sukuk and the RM11.0 billion government-guaranteed sukuk maturing after the rated programme. MARC considers the government’s golden share and indirect major shareholding in PLUS as well as the critical role of the North-South Expressway (NSE) in the country’s transportation system as factors underpinning the rating uplift; the 771-km NSE is the motorway backbone of the country and contributes more than two-thirds to PLUS’ total toll revenue.

The impact of the toll rate reduction by 18%, the COVID-19 pandemic and MCO-related measures to PLUS’ top-line has been significant, estimated at about RM1 billion in lost revenue for 2020. During the initial period of the MCO when the government had banned interstate travelling, PLUS’ traffic volume slumped by about 60% y-o-y. However, traffic started to pick up again since June 2020 following the easing of the government restrictions, with road traffic between July and September 2020 recovering to above 90% of pre-pandemic levels.  

For 9M2020, toll revenue declined by about 34% y-o-y to RM1.79 billion due to the MCO period coupled with the tariff reduction. As a result, operating cash flow of RM976.2 million for 9M2020 was also tangibly lower than in the past. Nevertheless, PLUS expects to receive some RM450 million in compensation from the government by year-end or early January 2021.

Focus on cash and capital preservation, including by reducing capex, has kept free cash flow satisfactory at RM907.1 million for 9M2020. PLUS has deferred most of its capex plan and major heavy repair expenditure for 2020 representing a material 61% or RM639 million reduction from the company’s capex budget. This includes a reduction of its heavy repairs budget by RM438 million. The budget allocated in 2021 for heavy repairs is also much lower at RM229 million, from about RM568 million budgeted in 2019. MARC notes that a significant deferment in road repairs could potentially lead to higher repair cost in the long term. However, this is partially mitigated by regular routine maintenance to ensure that PLUS’ facilities are in overall good condition. In this regard, PLUS has maintained its yearly budget for routine maintenance at around RM270 million to RM310 million for 2020/2021. 
  
In terms of cash flow generation, MARC’s projections on excluding capex indicate that PLUS would be able to meet its financial obligations in the near term, albeit considerably lower than in the past due to the toll cuts. Visibility on free cash flow will hinge on the extent PLUS can re-profile its capex budget and its dividend plans. In this regard, MARC expects the company to continue to manage its capex needs prudently to minimise the negative impact on free cash flow. In addition, MARC derives comfort from that fact that any coupon payment on the redeemable convertible unsecured loan stock (RCULS) is subject to the restrictive distribution covenant of 2.0x.  
 
PLUS’ large cash balance of RM2.9 billion as at end-September 2020 provides ample liquidity, well covering the RM1.97 billion of profit and principal repayments due next year while affording some headroom to navigate current challenges. 

The stable outlook assumes the traffic volume will continue to improve to pre-pandemic levels by 2022 and remain supportive of PLUS’ cash flow generation. When the toll restructuring negotiations with the government are completed in the near term, MARC will make a full assessment of the impacts on PLUS’ credit profile.

Major Rating Factors

Strengths
Portfolio of matured toll road concessions with stable traffic profiles;
Presence of cross-default provisions in government-guaranteed sukuk; and
Stature of shareholders.
Challenge/Risk
Highly susceptible to regulatory risks.

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