TRIS Rating has affirmed the company and senior debenture ratings of Bangkok Expressway PLC (BECL) at “A” with “stable” outlook. The ratings reflect the stability and reliability of its operating cash flows derived from the proven track record of traffic volume on BECL’s expressway network. These strengths are partially offset by the uncertainty over future government transportation policies, the political instability, the slowdown in domestic consumption, and the sizable investment required for any new expressway concession. The “stable” outlook reflects TRIS Rating’s expectation that BECL will continue to deliver strong operating performance and reliable cash flows. In addition, the company is expected to employ cautious financial policies during the investment period so as to maintain its credit rating quality.
BECL built and operates the elevated Si Rat Expressway (the Second Stage Expressway System -- SES) and the Udon Ratthaya Expressway (Bang Pa In-Pak Kret Expressway), known as Sector C+. Both expressways were established under 30-year Build-Transfer-Operate (BTO) concessions awarded by the Expressway Authority of Thailand (EXAT). The SES, the extension of the SES (Sector D), and the Sector C+ concessions will expire in 2020, 2027, and 2026, respectively. The SES is linked to the Chalerm Mahanakorn Expressway (the First Stage Expressway System -- FES), which was constructed and has been operated by the EXAT. The connection of both expressways creates a comprehensive network which provides an alternative to the heavily congested free roads within central Bangkok and for the route travelling north. BECL shares toll revenue with EXAT on the FES and SES Sector A and B. From March 2011 until the end of the concession, the revenue sharing ratio was 40% for BECL and 60% for EXAT. The toll revenues from the suburban network, consisting of Sector C, D, and C+, are not required to be shared with EXAT. In addition, BECL was awarded the concession for the Si Rat-Western Bangkok Outer Ring Road Expressway (SOE). The concession is a BTO concession, covering 30 years, including a construction period of up to 48 months. BECL will receive 100% of the tolls it collects. The total project cost is Bt25,491 million. The construction began on 15 December 2012 and scheduled to be completed in December 2016. The progress of the SOE project is as planned.
BECL’s strong business profile is supported by steady growth in the traffic volume on BECL’s network. In 2013, the average daily traffic volume grew by 1.4% to 1.100 million trips per day, compared with 1.085 million trips per day in 2012, despite the rises in the toll rates. In September 2013, toll rates on the FES and SES rose by Bt5-Bt10, depending on the type of vehicle. Toll rate on the Sector C+ also rose in November 2013 by Bt5 for 6-10 wheels vehicles and Bt10 for over 10-wheel vehicles. As a result, daily revenue increased by 4.3% in 2013 to Bt22 million per day. The prolonged political instability, a weaker economy, and rising household debt negatively impact demand on toll road for the first four months of 2014. The average daily traffic volume dropped by 2.9%, compared with the same period a year earlier, to 1.070 million trips per day. The drop occurred mainly on the urban routes. However, daily revenue increased by 4.7% y-o-y to Bt22.5 million per day, supported by the toll rate revisions in 2013.
BECL’s financial strength is average. Its operating leverage drives healthy profitability. However, its financial leverage is high, following the capital intensive nature of its business. In 2013, BECL reported a toll revenue of Bt8,040 million, up by 4%, compared with a year earlier. For the first quarter of 2014, the toll revenue increased by 3.6% year-on-year (y-o-y) to Bt2,045 million, despite a drop in traffic volume. The company’s liquidity weakened due mainly to an increase in debt needed to fund the SOE project. BECL plans to finance approximately 75% of the SOE project cost, or about Bt19,000 million, with long-term debt. The remaining balance will be funded by its operating cash flow. At the end of March 2014, the SOE project had utilized Bt5,400 million in debt, pushing BECL’s total debt to Bt29,984 million. As a result, the funds from operation (FFO) to total debt ratio weakened to 19.70% in the first quarter of 2014 (annualized with the past trailing 12 months), compared with 21.62% in 2013.
In January 2014, BECL adopted a Financial Reporting Standard Interpretations No. 12 – Service Concession Arrangements. Under the terms of the concession for the SES, BECL is obliged to compensate the EXAT for the land site acquisition cost of Bt16,816 million which the EXAT had paid in advance. The adoption of the new accounting policy required the compensation for the site acquisition cost to be on-balance booking as a financial obligation, and also recalculated the obligation payable through the concession life. As a result, as at 1 January 2014, BECL recorded an intangible asset of Bt1,895 million, reflecting the value of the remaining rights to use the sites for expressway construction. The new calculation method means BECL was supposed to incur higher accrued expenses in the past. Therefore, BECL had to incur the liability of Bt7,620 million and subtract the accumulative retained earnings of Bt4,833 million. Nonetheless, BECL has not raised any additional financial liability under this transaction and the new accounting policy has no impact on the actual compensation payment schedule which has long been agreed upon.
For financial analysis, TRIS Rating has recognized the net present value of the compensation payment as a financial liability since the beginning. However, the adoption of the new accounting policy has affected both the liabilities and equity base. Hence, the capital structure is affected to increase slightly. After adopting the new accounting policy, the adjusted debt to capitalization ratio was 59.86% in 2013, compared with 55.17% in 2012. Leverage rose further to 61.84% in the first quarter of 2014 due in part to the investment in the new expressway project.
Although demand for toll road is temporarily affected by the political unrest and economic slowdowns, TRIS Rating views that the toll road usage will be able to grow moderately in the medium term. The growth is supported by the increase in the number of cars registered in Bangkok and the vicinity and expansion of residential property in the outskirt areas. Under TRIS Rating’s base scenario, BECL is expected to grow its revenue by 2%-5% annually over the next three years. BECL is also expected to generate stable cash flow in order to meet its financial obligations, planned capital expenditures, and dividend payments. FFO is expected to be Bt5,000-Bt5,500 million per annum over the next three years, taking into consideration the rise in financial expenses following its debt funding plan and the revision of corporate income tax back to 30% in 2015. In terms of capital structure, TRIS Rating expects that the company’s financial leverage will further increase in the medium term due to the investment needed for the SOE project. The debt to capitalization ratio is expected to gradually rise and peak at around 70% while the new expressway is under construction.
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