Thursday, Apr 26, 2018
UEM
Edgenta is majority-owned by UEM Group Berhad, a government-linked entity with
significant business interests in key economic sectors. The affirmed ratings
primarily reflect UEM Edgenta’s strong business profile as a longstanding
provider of hospital support and highway maintenance services. These businesses
are undertaken through long-term agreements and generate steady income. The
long-term rating is also underpinned by MARC’s assessment of parental support
from UEM Group. The key moderating factor is the periodically high working
capital requirement that has weighed on operating cash flow.
UEM
Edgenta’s recent disposal of its 61.2% subsidiary Opus International
Consultants Ltd (OIC), a New Zealand-based company involved in asset
consultancy, has strengthened the group’s credit metrics. OIC has faced tough
operating conditions, mainly in the energy sector, which had impacted UEM
Edgenta’s financial performance in recent years. Part of the disposal proceeds
of RM463.0 million was used to pare down borrowings, reducing group
consolidated leverage to 0.35 times at end-2017 from 0.64 times as at end-2016.
Following the disposal, UEM Edgenta’s asset consultancy segment is now spearheaded
by its wholly-owned and domestically incorporated subsidiary Opus Group Berhad,
which currently undertakes consultation services on public and private
infrastructure projects.
UEM
Edgenta’s healthcare segment provides hospital support services to 32
government hospitals in northern Peninsular Malaysia through a 10-year
government concession agreement ending in 2025 as well as hospital support
services to the National Cancer Institute. MARC deems termination risk as low
given the group’s longstanding track record in the field. The group has further
strengthened its position in this segment following the recent acquisition of
Singapore-based UEMS Pte. Ltd. (UEMS), which also provides hospital
support services to 90 hospitals and healthcare institutions in Singapore,
Malaysia and Taiwan. The acquisition diversifies geographic risk with UEMS
accounting for about half of the group’s healthcare services revenue of RM912.3
million in 2017.
Its
highway maintenance services are undertaken through a long-term master
maintenance agreement ending in 2038 with related company Projek Lebuhraya
Usahasama Berhad (PLUS) which owns a portfolio of toll road concessions in
Peninsular Malaysia. MARC views the payment risk from PLUS as minimal given its
very strong capacity to meet its contracted obligations. Aside from the PLUS
contract, the group does maintenance works for Selangor
state roads,
the Lebuhraya Pantai Timur 2 Sdn Bhd’s East Coast Expressway and, abroad, for
the Cikampek-Palimanan toll road in West Java, Indonesia. In total, its
highway maintenance services cover 2,500km of highways and roads.
For
2017, UEM Edgenta recorded lower pre-tax profit of RM172.9 million (2016:
RM181.5 million) largely due to an increase in interest charges on borrowings
incurred to acquire UEMS in 4Q2016 as well as an increase in amortisation
of intangible assets.
Interest
charges going forward would ease as the group’s borrowings have reduced to
RM559.8 million at end-2017 from RM989.7 million at end-2016.
MARC is of the view that the loss of earnings from the
disposal of OIC would be offset by stable earnings from UEMS as well as organic growth and expected margin
improvements across UEM Edgenta's key businesses. MARC views the dividend income
from key subsidiaries in hospital support and highway maintenance services as
stable and sufficient to meet the holding company’s financial obligations on
its borrowings of RM301.7 million, including the outstanding RM50 million ICP
and RM250 million IMTN under the rated programme as at end-March 2018.
The
stable outlook incorporates MARC’s expectations that UEM Edgenta would maintain
credit metrics that are commensurate with the current rating band. However, a sharp
increase in leverage and/or significant changes in the non-concession business
that would affect its credit profile could result in downward rating pressure.
Contacts:
Saifuruddin Othman, +603-2717 2945/ saifuruddin@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my