LEBUHRAYA DUKE FASA 3 SDN BHD - 2021 |
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| Report ID | 60538900389 | Popularity | 787 views 115 downloads | |||||
| Report Date | Nov 2021 | Product | ||||||
| Company / Issuer | Lebuhraya Duke Fasa 3 Sdn Bhd | Sector | Infrastructure & Utilities - Toll Road | |||||
| Price (RM) |
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| Rationale |
Rating action MARC has affirmed its rating on toll concessionaire Lebuhraya DUKE Fasa 3 Sdn Bhd’s (DUKE 3) RM3.64 billion Sukuk Wakalah at AA-IS with a stable outlook. Rationale The rating incorporates the adequately structured sukuk repayment profile that accommodates the traffic ramp-up of the 32-km Setiawangsa-Pantai Expressway (SPE) that DUKE 3 is constructing under a concession agreement (CA) with the Malaysian government ending August 5, 2069. The back-ended financing structure of the project — with the first principal repayment of RM5.0 million due in August 2024 and its gradual step-up feature — provides some headroom for DUKE 3 to build up traffic volume, generate cash and meet its financial obligations. The rating also reflects DUKE 3’s strong liquidity position that is supportive of its financial service cover ratio (FSCR) that remains above the covenanted 1.5x. Our rating further considers SPE’s well-positioned alignment within mature catchment areas and the competitive benefits to traffic travelling between the northeast and southeast of Kuala Lumpur given its cost advantages and shorter travelling time, especially during peak hours. The SPE connects Middle Ring Road 2 (MRR2) at Wangsa Maju to Kerinchi Link adjoining Federal Highway. As of September 25, 2021, the project was 87.3% completed, with completion targeted by October 31, 2021 per the new timeline given by Lembaga Lebuhraya Malaysia (LLM). The deadline for completion has been extended from November 2020 to end-October 2021. Progress was largely hampered by certain delays in site possessions — these have since been resolved except for two parcels within DUKE 3’s Right of Way, which are not expected to materially derail progress — and the various phases of movement restrictions imposed to contain the COVID-19 pandemic. DUKE 3 expects to be able to commence tolling by January 2022, just within our negative sensitivity of a six-month delay for the issuer. In this regard, DUKE 3 has plans to first open completed Section 4 (Setiawangsa–Taman Melati) to the public in the near term, subject to LLM’s approval. Based on the projections provided, Section 4 is estimated to bring in about one-third of revenue upon SPE’s full operations. Our assessment indicates no pressure on the company’s debt-servicing ability in the short to medium term given that it has RM776.7 million in cash and cash equivalents as at end-September 2021 to address liquidity risk. The current financing structure also provides DUKE 3 with a 31.5-year tail period, providing room for a refinancing exercise, if required. However, the slower-than-expected progress made on the construction as well as traffic demand risk remain moderating rating factors. While completion is targeted for October 31, the concessionaire has requested for an extension of time (EOT) to March 2022, the full extent allowable under the concession agreement per management’s estimate. However, this is pending approval. Any impact on DUKE 3’s financial metrics from delay is expected to be cushioned by an additional RM90 million that project sponsor Ekovest Berhad will place in the Operating Revenue Account (ORA) upon completion of the project. At the same time, RM184.5 million currently in the Construction Reserve Account will also be transferred into the ORA. The total RM274.5 million in the ORA — in the form of irrevocable and unconditional bank guarantee (BG) — can be drawn down partly or fully when required to ensure the transaction finance service coverage ratio (FSCR) with cash balances is maintained above the covenanted 1.5x. This will help allay delay and cost overrun risks. Construction cost-related risk is largely addressed by a fixed-priced, lump-sum turnkey engineering, procurement and construction (EPC) contract with Ekovest. We understand that there are various design enhancements carried out outside the original scope of the project, costing RM417.2 million. This amount will be covered by ultimate shareholder Ekovest via injection of new equity of equivalent amount in the form of ordinary shares subscription, of which RM100.0 million has been placed on July 26, 2021. Under the base case projections, minimum and average FSCR are expected at 2.8x and 3.4x over the sukuk tenure. Assuming tolling is to start in July 2022 (six months later than January 2022 as anticipated by DUKE 3), FSCR would remain comfortable at 2.7x in FY2036. The base case has, nevertheless, assumed interest and principal repayments on the Reimbursable Interest Assistance (RIA) totalling RM639.6 million over FY2024–FY2040. The RIA is technically subordinated to the sukuk in terms of cash flow or payment priority. On the assumption that all payments relating to the RIA are deferred to after FY2040 (i.e. after the full repayment of the sukuk), combined with the 1-year delay in toll commencement date and toll hike, DUKE 3’s debt servicing ability remains strong with minimum and average FSCR estimated at 2.5x and 3.0x. Under this assumption, our analysis further indicates that DUKE 3 could tolerate up to a 10.3% decline in the projected traffic volume and still meet the covenanted FSCR of 1.5x throughout the transaction tenure. A reduction by more than 14.1%, however, could lead to the FSCR falling below the breakeven 1.0x; under this scenario, debt coverage is projected to be at the lowest 1.0x in FY2038, while still giving a healthy average FSCR of around 2.0x. Rating Trajectory Upside scenario Upside is unlikely in the current challenging operating environment due to the COVID-19 pandemic, resulting in stricter implementation measure by the government, and given the still present construction risk.oo Downside scenario Major execution failures, including a severe delay in project completion and large cost overruns would weigh on cash flow generation and financial metrics. Key strengths • Well-positioned alignment within mature catchment areas • Accessibility via a network of major roads • Accommodative debt amortisation schedule vis-à-vis project cash flows • Long-dated concession tenure Key risks • Risk of toll hike deferrals and delays in receipt of government compensation • Moderate debt protection measures for the sukuk • Construction cost overruns and completion delay |
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