Published on 13 Jan 2020.
RAM Ratings has reaffirmed the AA2/Stable ratings of Lingkaran Trans Kota Sdn Bhd’s (Litrak or the Company) Sukuk Musyarakah IMTN I and II Programmes (2008/2023), which have a combined value of up to RM1.45 bil (collectively, the Sukuk). The reaffirmation of the ratings is based on our expectation that the Company will maintain its strong cashflow and debt-servicing abilities, backed by the mature traffic performance of Lebuhraya Damansara-Puchong (LDP or the Highway).
In 2019, the Government of Malaysia (GoM) announced plans to acquire selected highways following the deferment of its planned of toll abolition. That said, the Ministry of Finance’s (MOF) offer to take over the LDP and three other highways in which Gamuda Berhad owns majority stakes is under negotiations, pending finalisation of the terms of the definitive agreements by end-February 2020 (extended from end-December 2019). We highlight that the reaffirmed ratings are premised on the performance of the LDP, rather than the proposed takeover. As at end-September 2019, RM790 mil of the Sukuk remained outstanding.
In FY Mar 2019, the LDP’s average daily traffic (ADT) slipped 1.57% to 435,948 vehicles (slower than the -2.44% in FY Mar 2018), due to continued migration to Duta-Ulu Kelang Expressway 2 as well as the Sungai Buloh-Kajang Mass Rapid Transit (SBK MRT) Line and the Kelana Jaya and Ampang Light Rail Transit (LRT) Lines. Three years after the extension of the LRT lines and the commencement of the SBK MRT Line, migration from the LDP has now tapered off. Traffic flow on the LDP has stabilised somewhat at current levels. In 1H FY Mar 2020, the Highway’s ADT edged up 0.40% y-o-y to 437,678 vehicles - its first uptrend in four years.
A toll rate increase - from RM2.10 to RM3.10, as scheduled under the Concession Agreement (CA) - was deferred during the reviewed period. Nonetheless, the payment of compensation by the GoM and a gradual improvement in traffic volume had broadened the Company’s debt coverage. Litrak’s robust pre-financing cashflow and healthier cash reserves lifted its finance service coverage ratio (FSCR) to 4.09 times (with cash balances, post distribution) in FY Mar 2019 (FY Mar 2018: 3.89 times). On the Sukuk’s latest repayment date of 15 October 2019, Litrak registered an FSCR of 2.43 times (with cash balances, post-distribution).
Going forward, the LDP is expected to continue registering steady traffic volumes, thereby supporting its cash-generating and debt-servicing abilities. Based on our cashflow analysis, which incorporates a tariff rise in 2021, potential traffic diversion to competing infrastructure and a two-year delay in the receipt of government compensation, Litrak’s FSCR (with cash balances, post-distribution, calculated on payment dates) is projected to come in at a minimum of 2 times throughout the tenures of the Sukuk. Any traffic outperformance could allow the Company to increase its dividend payouts, as long as this is permissible under the financial covenants. However, cash retention must be prioritised given the lumpy principal repayments ahead.
The ratings will come under pressure if government compensation is delayed beyond our two-year assumption. Despite the slower compensation payments assumed in our sensitised cashflow analysis, Litrak has been receiving compensation payments from the GoM in lieu of its inability to elevate toll rates as per the CA. We believe that the GoM will continue honouring the compensation arrangement pending the completion of the proposed takeover. Litrak is also vulnerable to single-project risk given that its income is derived from a specific project. However, it is unlikely that the entire stretch of the 40-km LDP will be disrupted at any particular time.
Liew Kar Ling
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Ratings on Lingkaran Trans Kota Sdn Bhd