Published on 18 Jan 2023.
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.
UEM’s credit profile remains commensurate with its current rating, notwithstanding its more moderate business strength and ongoing weakness in cashflow debt coverage. The rating continues to incorporate our expectation of government support, premised on UEM’s strong links with Khazanah Nasional Berhad – Malaysia’s sovereign wealth fund – and the Group’s role as a custodian of key strategic national assets.
Long-drawn negotiations on Projek Lebuhraya Usahasama Berhad’s (PLUS, ultimately 51%-owned by UEM via its shareholding in PLUS Malaysia Berhad (PMB)) toll restructuring exercise have been concluded, with supplementary concession agreements inked in October 2022. The concession period of all PLUS highways has been extended to 2058, as compensation for the government’s decision to reduce highway tolls by 18%. Under the toll restructuring terms approved by the government, PLUS is restricted from making dividend payments until 2038. Both PLUS’s ultimate shareholders, UEM and the Employees’ Provident Fund, will instead be entitled to an RM8 bil one-off distribution (via a RM8 bil sukuk issuance by PLUS) - essentially realising most of their investment value in PLUS upfront.
UEM’s share of distribution (approximately RM4 bil) is expected to be substantially upstreamed to Khazanah. This will reduce UEM’s cashflow diversity as PMB had been a material and relatively stable cashflow contributor to the Group. Our projections assume that none of the RM4 bil sukuk from the immediate value realisation of the Group’s investment in PLUS is retained at UEM.
At the consolidated level, without any offset for the loss of yearly dividends from PLUS, the Group’s adjusted operating cashflow debt coverage will stay strained at around 0.05 times going forward (FY Dec 2021: 0.01 times). This factor is balanced by minimal financial risk at the company level, given UEM’s company-level cash buffers and modest debt load. While less diverse than before, UEM’s key subsidiaries – UEM Edgenta Berhad and UEM Sunrise Berhad – continue to anchor the Group’s credit profile. Both UEM Edgenta and UEM Sunrise are dominant players in their respective industries, with established operational track records and good franchises. UEM is also a well-known name in the infrastructure space and serves as Khazanah’s infrastructure platform.
The rating of United Growth Berhad is linked to the credit profile of the Group as the former’s Islamic structure provides recourse to UEM by virtue of its obligations under a purchase undertaking.
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Thong Mun Wai
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