MARC Ratings has affirmed its AA-_IS rating on Cerah Sama Sdn Bhd’s RM420.0 million Sukuk with a stable outlook. The outstanding under the rated programme stood at RM330.0 million as of November 30, 2022. 

Cerah Sama is the investment holding company of Grand Saga Sdn Bhd, the concessionaire of the 11.5-km Cheras-Kajang Highway. The rating reflects the resilient traffic performance of the mature Cheras-Kajang Highway and its stable cash flow generation. The highway, which has two toll plazas at Batu 9 and Batu 11, has been operational since 1999. Cerah Sama’s strong liquidity position and the accommodative sukuk repayment structure are also positive rating considerations. These strengths are moderated by Cerah Sama’s moderately high leveraged capital structure, in part due to its sizeable dividend distribution.

Traffic volume has rebounded strongly to pre-pandemic levels, with the average daily traffic (ADT) at 146,066 vehicles through 10M2022 reaching 98%-99% of the 2019 level. We expect normalised traffic patterns, which would allow Cerah Sama to maintain a broadly stable financial performance going forward.

For 1H2022, revenue and operating profit before interest, tax, depreciation, and amortisation (OPBITDA) increased 22.6% and 34.2% y-o-y to RM41.9 million and RM31.1 million on strong traffic recovery. Assuming recent traffic trends hold, we project toll revenue could stabilise around RM70 million to RM75 million this year (before compensation), and to RM130 million to RM140 million (with compensation) in 2022-2030. Based on our OPBITDA margin assumption of about 75% (past five-year average: circa 80%), OPBITDA could decline to between RM95 million and RM105 million over the same 2022-2030 period.   

Liquidity remains relatively strong, with cash of about RM58 million as at end-June 2022. This is expected to improve to between RM75 million and RM80 million by end-2022, which would be more than sufficient to meet the sukuk’s RM30.0 million principal repayment due on January 31, 2023.

Cerah Sama’s leverage as measured by its debt-to-equity (DE) ratio remains relatively high, although this has recently been managed down to 2.9x as at end-June 2022 (end-2021: 3.1x; end-2020: 4.1x). In this regard, we expect Cerah Sama to prudently distribute dividends without compromising liquidity and leverage metrics and adhere to a minimum finance service cover ratio (FSCR) of 1.75x. 

Base case cash flow projections show a minimum pre-distribution FSCR of 2.5x in 2023 with an average of 3.0x for the 2022-2030 period. Under MARC Ratings’ sensitised case which assumes a delayed toll compensation and traffic at a historical compound annual growth rate (CAGR) of 1%, the average pre-distribution FSCR is 2.4x and the minimum FSCR is 2.0x in 2026. 

The dividend outflow as projected in the base case would have a more significant impact on the FSCR. Our analysis indicates dividend distribution may need to be reduced by about 15% from the base case over 2022-2030 to comply with the covenant. Under a conservative assumption of no toll compensation after 2025, we estimate Cerah Sama would need to reduce this further by upwards of 75%. Prudent dividend upstreaming would become increasingly important in this regard.

The stable outlook reflects our assessment that Cerah Sama would be able to generate sufficient cash flow and maintain healthy cash levels to meet its financial obligations. We also expect the company to exercise discipline on dividend distributions, ensuring its liquidity and leverage metrics are not compromised. 

A rating upgrade is not expected in the near term. On a longer term, any upgrade will take into consideration a sustained improvement in profitability, cash flow generation and overall financial profile.

The rating may be pressured if there is a sustained deterioration to the company’s financial metrics, which could arise, inter alia, from aggressive dividend flow and a weakening of management’s commitment to meet the covenanted FSCR level, or if there is a material degradation of traffic and revenue expectations.