MARC has affirmed its AA-_IS rating on Cerah Sama Sdn Bhd's RM420.0 million Sukuk with a stable outlook. The outstanding currently stands at RM360.0 million.

The affirmation reflects Cerah Sama’s resilient cash flows backed by steady traffic volumes on its mature, 22-year-old Cheras-Kajang Highway. Strong cash reserves and an accommodative sukuk repayment structure further support the rating. However, moderating the rating is the company’s leveraged capital structure.

Cerah Sama’s 2020 financial performance has met our expectations. Similar to other MARC-rated toll roads, traffic volume on Cheras-Kajang Highway was challenged by the pandemic. Average daily traffic declined 19.8% y-o-y in 2020 to 118,838 vehicles, but was within our previous forecast of a 15%-20% reduction amid the pandemic. The impact to operating cash flow (CFO) – a reduction to RM41.3 million in 2020 from RM54.1 million in 2019 – was also broadly in line with our previous expectation of CFO falling in the RM36 million to RM42 million range.

Traffic through August 2021 remained below 2019 levels by some 35%. We, nevertheless, expect traffic to improve with the lift in travel bans nationwide, and believe that it will gradually return to the pre-pandemic levels in the next 12-18 months, provided there are no further movement restrictions. Assuming a normalisation of traffic in 4Q2021, traffic volumes for full year 2021 could still be below 2019 levels by an estimated 25%-30%. Still, we anticipate Cerah Sama’s 2021 top line to improve, ending the year with a revenue of around RM100 million to RM110 million, supported by toll compensation from the government for no toll increase in 2020, for which it had received RM43.7 million on July 21, 2021.

For a matured highway asset, Cerah Sama’s leverage remains moderately high with a debt-to-equity ratio of 4.2x as at 1H2021 (2020: 4.1x), largely on account of high dividend distribution. Under our sensitised case assuming 2022 traffic at 90% of the 2019 threshold, we expect minimum financial service cover ratio (FSCR) to remain above the covenanted 1.75x. An assumption of a one-year delay in the payment of toll compensation, however, could have a more significant impact on the FSCR. Prudent dividend upstreaming becomes increasingly important in this regard. Meanwhile, the company maintains a relatively strong liquidity position, supported by RM84.45 million of cash and cash equivalents as at August 31, 2021. This should be sufficient to meet the sukuk’s RM30 million principal repayment due on January 31, 2022.