Thumbs up for Government’s decision to acquire the Eastern Dispersal Link

PETALING JAYA: The Government's decision to acquire the Eastern Dispersal Link (EDL) in Johor Baru from Malaysian Resources Corp Bhd (MRCB)
has helped resolve major uncertainties pertaining to a “non-tolling”
situation and improve the balance sheet of MRCB, according to UOB Kay
Hian Research.
“Although MRCB loses a steady income stream after
the asset sale, we reckon this outweighs the risk of a prolonged
non-tolling' situation,” the research house wrote in its recent report.
“We
are positive on the asset sale and, while the acquisition price has not
yet been determined, we believe the Government would likely pay at our
assessed price tag,” it said, adding that conservatively, it valued
EDL's equity value at RM546mil based on 50,000 vehicles per day and
toll charge of RM6.20 per travel.
To recap, the Government
announced last month that it would take over EDL from MRCB to settle
issues related to policy and toll charges for the highway. The cost and
terms of the acquisition were expected to be revealed by the end of the
year.
“Overall, the sale should significantly boost MRCB's
balance sheet, and our analysis suggests that the reduction of MRCB's
profit and loss is minimal,” UOB Kay Hian said.
It also pointed
out that the acquisition, which would help resolve EDL's cash-flow
problems, would provide a trading opportunity for MRCB's shares.
The counter yesterday gained six sen to close at RM1.75 on volume of 9.7 million shares.
The precarious liquidity situation of MRCB Southern Link Bhd,
a funding conduit for the 8.1km EDL, had been highlighted in recent
months after the Government prohibited the MRCB group from collecting
toll charges according to the terms in the concession agreement as the
charges had yet to be approved by the Government.
It was
estimated that the move had resulted in start-up losses amounting to
RM40mil and finance costs of RM7mil per month for MRCB.
MRCB Southern Link debt ratings had also been progressively downgraded by RAM Ratings Bhd in recent months due to the former's “significant liquidity stress.”
“After
the unexpected RM40mil payment to the engineering, procurement and
construction (EPC) contractor, MRCB Southern Link has a high likelihood
of defaulting on both the senior and junior sukuk on Dec 21, 2012,” RAM
Ratings said in a note last month.
The rating agency had then
downgraded the long-term ratings of MRCB Southern Link's RM845mil
secured senior sukuk (2008/2025) and RM199mil junior sukuk (2008/2027),
to BB3 (from A2) and C1 (from BBB2), respectively, and put both on negative rating watch.
Some
analysts argued that the Government's intention to acquire the EDL
would therefore save MRCB Southern Link's creditors from facing
potential default losses.
As at end-July 2012, the consolidated
cash holdings of MRCB Southern Link and the concessionaire were around
RM21mil, against some RM47mil of debt obligations for the remainder of
this year.
RAM Ratings had earlier noted that if the management
had not made the RM40mil payment to the EPC contractor, MRCB Southern
Link would have instead been expected to default on the senior and
junior sukuk in December 2013.