TRIS Rating affirms the company rating and the ratings of outstanding senior unsecured debentures of Bangkok Expressway and Metro PLC (BEM) at “A”. At the same time, TRIS Rating assigns a rating of “A” to BEM’s proposed issue of up to Bt5,000 million in senior unsecured debentures. The proceeds from the new debentures will be used for investment in the mass rapid transit (MRT) Blue Line and for working capital.
The ratings reflect BEM's strong business profile, supported by stable and predictable operating cash flow and the growth prospects in the MRT segment. These strengths are partially offset by uncertainty over the renewal of the urban sector expressway concession which will expire in 2020, plus rising leverage from new investments in MRT projects.
BEM was established on 30 December 2015 through the amalgamation of Bangkok Expressway PLC (BECL) and Bangkok Metro PLC (BMCL). BEM was listed on the Stock Exchange of Thailand (SET) on 5 January 2016. BEM's major shareholder, as of April 2017, was CH. Karnchang PLC (CK), which held 29.98% of the company’s outstanding shares.
BEM's three main lines of business include constructing and operating expressways, providing mass rapid transit service, and engaging in the commercial development related to its expressway and metro networks. For the first half of 2017, the company reported revenue of Bt7,437 million, of which 66% was from the expressway segment, 30% from the MRT segment, and 4% from the commercial development segment.
BEM built and operates the elevated Si Rat Expressway (the Second Stage Expressway System -- SES), the Udon Ratthaya Expressway (Bang Pa In-Pak Kret Expressway, known as Sector C+), and the Si Rat-Outer Bangkok Ring Road Expressway (SOE). All the expressways are operated under 30-year Build-Transfer-Operate (BTO) concessions awarded by the Expressway Authority of Thailand (EXAT). The concessions carry different expiration dates. The SES concession, covering Sector A, B, and C, will expire in 2020. The concessions for the extension of the SES (Sector D), Sector C+, and the SOE will expire in 2027, 2026, and 2042, respectively.
BEM's strong business profile is underpinned by stable and predictable performance of the expressway segment. The average daily traffic volume on the expressway network grew by an average of 2.8% per year during 2012-2016. For the first seven months of 2017, the average daily traffic volume was 1.2 million trips per day and the average daily toll revenue was Bt27.01 million per day. The main risk associated with the expressway segment is uncertainty surrounding the SES expressway concession (Sector A, B, and C) which is expiring in 2020 and subject to renewal. This will affect BEM's earnings as around 40% of its revenue and over 50% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) are from the operation of the urban sector expressways.
On 31 March 2017, BEM entered into a new MRT Blue Line concession agreement with the Mass Rapid Transit Authority of Thailand (MRTA). The new MRT Blue Line concession covers the MRT Chaloem Ratchamongkhon Line (Hua Lamphong Station - Bang Sue Station) which has been in operation since 2004 and the MRT Blue Line Extension project (Hua Lamphong Station - Lak Song Station and Bang Sue Station - Tha Phra Station) which is expected to be fully operational in 2020. The new concession will end in 2050. The MRT Blue Line concession is on a Public-Private Partnership (PPP) Net Cost agreement basis in which BEM has the rights to collect fare box revenue, undertake commercial development activities, and bear the risk of ridership.
Ridership on the existing MRT Blue Line has improved continuously during the past five years, supported by the shift in demographics and new population trends toward condominium along the MRT lines. The ridership grew by an average of 8% per annum during 2012-2016. For the first seven months of 2017, average daily ridership was 286,520 trips and average daily revenue was Bt7.13 million.
BEM also operates the MRT Chalong Ratchadham Line (Purple Line) under a 30-year concession on a PPP Gross Cost scheme basis. Under this scheme, the MRTA paid for all the civil works while BEM prefunded the investment in the mechanical and engineering (M&E) systems and the rolling stocks. The MRTA is gradually repaying the cost of investment in the M&E equipment to BEM over 10 years after BEM delivered and transferred ownership of the M&E equipment to the MRTA. BEM provides operation and maintenance (O&M) services to the MRTA throughout the concession period, which will end in 2043. In return, BEM receives service revenue on a cost-plus basis. BEM does not take a risk of ridership under the Gross Cost scheme.
Going forward, TRIS Rating is of the view that BEM's business risk profile will hinge more on the operations of the MRT segment, following the government's policy on the development of an integrated mass transit system. As an experienced and equipped operator, BEM is in an advantageous position to win future operating concessions in the government's comprehensive mass transit plan. In addition, BEM's MRT Blue Line, once the extension is completed, will form a circle line which poses a strategic advantage as connecting points with other MRT lines, feeding ridership into its system.
BEM's financial risk profile reflects its steady operating cash flows, but it is offset by high financial leverage due to the capital intensive nature of its main business. BEM reported Bt7,437 million in revenue for the first half of 2017, up 25.1% from the same period last year. The rise in revenue was mainly due to the operation of the MRT Purple Line and the SOE expressway, both opened in August 2016. Profitability remains healthy, due mainly to the strong profitability of the expressway segment. The operating margin (operating income before depreciation and amortization as a percentage of sales) was at 52.46% in the first half of 2017.
Under the base-case scenario, TRIS Rating forecasts BEM’s revenue to grow at least 7% annually, on average during 2017-2019. The operating margin is expected to stay around 50%, taking into account the step-up in the amount of remuneration BEM is committed to pay to the MRTA annually.
BEM's financial leverage is rising. The MRT Blue Line Extension project requires a total investment of Bt22,036 million during 2017-2019. BEM plans to fund the investment with bank loans and debentures. The ratio of total debt (including provisions for land site acquisition in the expressway business) to capitalization will increase from 61.73% at the end of June 2017 to a peak of 65%-70% in 2018-2019. When calculating the ratios, TRIS Rating excludes a debt of approximately Bt14,000 million from the investment in the M&E systems and the rolling stock of the Purple Line, which is currently on CK's books. This debt is backed by the agreement with the MRTA, stipulating that the debt will be paid back in 10 years.
BEM's liquidity profile is supported by steady operating cash flow and financial flexibility from its investments in associated companies. For the first half of 2017, the ratio of funds from operations (FFO) to total debt was 15.47% (annualized from trailing 12 months) while the EBITDA interest coverage ratio stayed at 5.44 times.
Over the next 12 months, from 30 June 2017, TRIS Rating assesses BEM's liquidity as adequate. BEM's primary funding needs are scheduled debt repayments of approximately Bt2,500 million, planned capital expenditures of Bt10,000-Bt12,000 million, and dividend payments forecast at Bt1,600-Bt1,800 million. Sources of funds include expected FFO of at least Bt6,000 million, plus cash and cash equivalents of Bt3,371 million on hand at the end of June 2017. Capital expenditures are expected to be funded mainly by bank loans and new debt issuances in the capital market. In addition, BEM has financial flexibility from its investments in TTW PLC and CK Power PLC, of which the combined market value was Bt12,994 million as of 25 August 2017.
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