MARC has affirmed its BBB-_IS rating on Senai-Desaru Expressway Berhad’s (SDEB) RM1.89 billion Islamic Medium-Term Notes (Restructured Sukuk) Programme with a stable outlook. SDEB is the concessionaire of the 77-km tolled inter-urban Senai-Desaru Expressway (SDE) in Johor which links the towns of Senai and Desaru with a connecting highway to Pasir Gudang.

The rating incorporates SDEB’s accommodative debt repayment schedule with step-up profit rates which alleviates liquidity pressure in the initial years of the sukuk programme. The rating also considers SDEB’s modest cash flow generation, its weak financial leverage metrics and its significant reliance on planned developments in the highway’s catchment areas.

For the first eight months of financial year ended June 30, 2019 (8MFY2019), traffic volume growth on SDE registered 1.1% y-o-y growth to 6.73 million passenger car units. The growth rate has steadily decreased in recent years, from 16.3% in FY2016 to 6.16% in FY2018. This decline is mainly attributed to the lower volume of commercial vehicles (Class 2 and Class 3) travelling to Pengerang in line with the reduced construction activities in PETRONAS’ Refinery and Petrochemical Integrated Development (RAPID) project which has reached its final phase. As such, MARC views the success of planned developments along the expressway as critical in supporting toll revenue growth, as the expressway would need to register an average growth of 7.8% p.a. between FY2019 and FY2027 to support SDEB’s finance service obligations in the later years.

For 8MFY2019, SDEB’s revenue was flat at RM51.7 million but the company posted higher pre-tax losses of RM98.7 million, mainly on increased finance costs to RM115.5 million which led to higher accumulated losses of about RM1.38 billion. The finance costs comprise largely of interest expenses on irredeemable convertible unsecured loan stock which are non-cash in nature and the profit payment on the rated programme which has increased under the scheduled step-up structure to 1.3% (2018-2021).

Cash flow from operations (CFO) declined to RM18.2 million mainly due to higher highway maintenance and asset replacement costs. As a result of the lower CFO and the scheduled hike in the profit payment rate, CFO interest coverage was lower at 1.46x. Cash and bank balances stood at RM66.2 million as at end-8MFY2019, which would be sufficient to service its next profit payment in December 2019. Based on the latest cash flow projections under the rating case assumptions, SDEB is expected to record a minimum and average pre-distribution finance service cover ratio of 1.45x and 3.26x throughout the sukuk tenure.

SDEB’s toll rates have remained unchanged since the last rating review; the company is not expected to receive any government compensation for the deferred toll hikes as the actual revenue in FY2018 was higher than the stipulated revenue in the Supplemental Concession Agreement. Given that SDEB expects actual traffic to surpass the projected volume in 2019, it does not anticipate any compensation for the deferred toll hikes this year. The company, however, received compensation amounting to RM47.0 million from the government for the 50% discount offered during the Hari Raya festive season in June 2018.

The stable outlook reflects MARC’s expectation that SDEB’s traffic performance and its ability to maintain a liquidity buffer would be in line with the projections. Any revision to the rating and/or outlook would also depend on the outcome of deferment on the upgrading works or any material deviations from the assumptions set out in the projections.

Contacts:
Ati Affira Kholid, +603-2717 2941/affira@marc.com.my;
Lim Chi Ching, +603-2717 2963/ chiching@marc.com.my.