CREDIT ANALYSIS REPORT

PROJEK LEBUHRAYA USAHASAMA BERHAD - 2021

Report ID 60538900456 Popularity 71 views 31 downloads 
Report Date Dec 2021 Product  
Company / Issuer Projek Lebuhraya Usahasama Berhad Sector Infrastructure & Utilities - Toll Road
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has affirmed its AAAIS rating on Projek Lebuhraya Usahasama Berhad's (PLUS) RM23.35 billion Sukuk Musharakah Programme with a stable outlook. The outstanding currently stands at RM17.9 billion following the redemption of RM500 million in January 2021.

We have assessed PLUS’ credit profile in the context of its existing concession agreement (CA) and debt structure. At this juncture, the negotiations between the toll concessionaire and the government concerning a toll restructuring are still unresolved. In the meantime – as indicated in a letter from the Ministry of Finance (MOF) to PLUS on January 31, 2020 – 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. 

Rationale     
The rating 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 (GG sukuk) maturing after the rated programme. The government’s golden share and indirect major shareholding in PLUS, as well as the company’s North-South Expressway’s (NSE) critical role in the country’s transportation system, are 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.

PLUS’ standalone rating meanwhile reflects its matured highway portfolio, with a history of stable traffic and revenue profile. Though traffic levels have been hit by the impact from pandemic-induced shutdowns, we note that traffic flow has improved since the easing of travel bans nationwide and believe that it will gradually return to pre-pandemic levels, absent any furthermovement restrictions. For 8M2021, the average traffic on PLUS’ road networks fell 23.9% y-o-y while 1H2021 revenue contracted by 14.9% y-o-y to RM1.2 billion. Operating cash flow in 1H2021 likewise reduced to RM854.6 million compared with the RM1.3 billion half-year average before the pandemic. PLUS, nevertheless, expects to receive toll compensation of approximately RM500 million from the government in the near term. 

Notwithstanding weaknesses in the last 12-18 months, PLUS’ traffic profile has proven stable in the past as reflected by its low 2016–2019 peak-to-trough volume variance of only about 2%. We note that in the periods during the pandemic when restrictions were lifted or eased (notably June–August 2020), traffic on its highways rebounded strongly close to pre-pandemic levels. Although the timing and shape of recovery is still uncertain, we believe traffic should recover from peak contractions. Accordingly, we expect progressive traffic recovery by 2022–2023 from the COVID-19 shock in 2020–2021.

The cash flow projections assumed a traffic recovery to 93% of 2019’s traffic levels in 2022 and a full recovery by 2023. Our rating case further assumed no toll compensations. PLUS — as at end-June 2021 — had RM2.8 billion in cash, providing ample liquidity cushion against RM2.1 billion of principal and profit obligations due in 2022. A strong liquidity position would also provide PLUS with some headroom to withstand a slower-than-expected recovery in road traffic.

We expect PLUS to remain in cash conservation mode in the short and medium term in light of the challenging operating environment. The company had significantly reduced capex spending during 2020–2021, particularly on major heavy repairs. In 1H2021, it spent RM154.9 million on heavy repairs, around half the level it normally expended before the pandemic. Spending on routine maintenance of RM184.0 million in 1H2021, nevertheless, remained broadly in line with pre-pandemic levels. As a result, free cash flow remained positive at approximately RM820.3 million in 1H2021. 

While PLUS has yet to finalise its 2022 budget for heavy repairs, routine maintenance capex is expected to remain steady at around RM287.5 million. In relation to the redeemable convertible unsecured loan stock (RCULS) concerning the shareholders, there were no coupon payments made during 8M2021. Overall, the visibility on free cash flow will hinge on the extent PLUS can re-profile its capex and dividend payouts. In this regard, PLUS could hold back from dividend distribution and retain cash to ensure that overall key financial metrics remain healthy. The requirement of PLUS to maintain a post-distribution finance service cover ratio (FSCR) of 2.0x provides comfort. 

Rating outlook     
The stable outlook reflects our expectation that traffic volume will gradually improve to pre-pandemic levels by 2023, and remain supportive of PLUS’ cash flow generation. We expect PLUS to maintain a satisfactory level of free cash flow through prudent financial management, particularly with respect to capex and dividend payouts, and maintain the FSCR within the covenanted 2.0x.

Rating trajectory

Upside scenario     
Not applicable as the rating is already at the highest level on MARC's rating scale.

Downside scenario     
There could be downward rating pressures in the event of a sustained traffic and cash flow underperformance beyond our expectations and/or adverse policy or regulatory changes in the toll road sector weighing on PLUS’ credit metrics. 

Key strengths
Portfolio of matured toll road concessions with stable traffic profiles
Presence of cross-default provisions in government-guaranteed sukuk
Key risk 
Highly susceptible to regulatory risks

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