Published on 31 Dec 2020.
RAM Ratings has reaffirmed the AA2/stable rating of UEM Group Berhad’s (UEM or the Group) RM2.2 bil Islamic Medium Term Notes (IMTN) Programme (2012/2042), issued through funding vehicle United Growth Berhad (United Growth). The rating reaffirmation - despite the more challenging outlook for its toll road and property segments - reflects our expectation of continued government support for the Group. This is backed by UEM’s strong links with Khazanah Nasional Berhad as well as its role as a custodian of key strategic assets of the Government via its portfolio of expressway concessions held under PLUS Malaysia Berhad (PMB) and sizeable land bank in Iskandar Puteri.
On 1 February 2020, the Government implemented a 18% toll reduction on all highways operated by Projek Lebuhraya Usahasama Berhad (PLUS) and Lebuhraya Pantai Timur 2 Sdn Bhd (East Coast Expressway Phase 2) - both are toll concessionaires and wholly-owned subsidiaries of PMB. This move follows the Government's announcement in January 2020 that the reduced toll rate will be maintained over the concession period, together with a waiver of toll compensation claims. In return, both toll concessionaires will be granted a 20-year concession extension. The implications on PLUS's financials and the interests of key stakeholders remain to be seen, pending negotiations with the Government. At the same time, the movement control order implemented by the Government following the pandemic had suppressed PLUS’s aggregate traffic volume in 9M 2020, with a 23.9% y-o-y decline.
In view of these developments, dividends from PMB (historically a major dividend contributor to the Group) are likely to be curtailed in the next 1-2 years, depending on the outcome of ongoing negotiations with the Government as well as the length and severity of the pandemic. That said, we believe the longer-term traffic growth prospects remain favourable.
While PLUS’s new concession terms are still being negotiated, we do not expect the outcome to have a significant detrimental impact on UEM’s credit profile over the long term. The borrowings and debt servicing obligations under PLUS are likely to be restructured to match its revised cashflows and concession terms, thus providing some room for PLUS to continue to flow up dividends. Any major deviation from our expectation will warrant a reassessment of the rating.
Meanwhile, its property segment – represented by its operations under UEM Sunrise Berhad (UEM Sunrise) – will be challenged by tapering contributions from its overseas projects which had boosted sales in 2019. We expect the segment’s performance to remain subdued in fiscal 2021 after slipping into a loss in 1H FY Dec 2020, given the sluggish property market and slow take-up rates partly due to the ongoing pandemic. The proposed merger between UEM Sunrise and Eco World Development Group Berhad has not been factored into our assessment, as no decision has been made yet and full details are not available.
On a more positive note, losses from UEM’s construction operations had narrowed y-o-y in FY Dec 2019 and 1H FY Dec 2020, after significant losses from cost overruns and construction delays in the past two years. The Group’s cement segment is also showing initial signs of turnaround, after years of losses amid severe industry overcapacity and price competition.
As at end-June 2020, UEM’s net gearing ratio had improved to 0.24 times (end-December 2018: 0.52 times), following the disposal of PT Lintas Marga Sedaya (the concession holder of the Cikopo-Palimanan highway) in 2019 and debt repayments relating to its overseas property projects. Going forward, UEM’s net gearing ratio is envisaged to stay within 0.35 times. However, UEM’s operating cashflow debt coverage is likely to be strained at around 0.05 times amid diminished dividends from PMB and weaker cashflows from its property operations in the next 1-2 years.
Despite pressures around its consolidated cashflow debt coverage levels, UEM’s strong company-level metrics mitigate any liquidity concerns. At the company level, UEM is in a net cash position, supported by fairly low debt levels (end-June 2020: RM356.1 mil). Its cash reserves of RM1.2 bil as at end-June 2020 provide some buffer to cushion potential weaker dividend inflows.
Wholly owned by UEM, United Growth had been set up to raise the IMTN. The sukukholders are effectively exposed to UEM’s credit risk through an irrevocable and unconditional purchase undertaking, as reflected by the rating of the IMTN.
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