TRIS Rating affirms the company rating on Don Muang Tollway PLC (DMT) and the ratings on its outstanding senior unsecured debentures at “BBB+”. The ratings reflect the strategic location of DMT’s tollway, stable cash flow, and improving financial leverage. These strengths are partially offset by the company’s reliance on a single cash-generating asset and the uncertainty concerning the legality of the latest amendment to the concession agreement, pending the final ruling from the Supreme Administration Court.
KEY RATING CONSIDERATIONS
Strategic location and steady growth
DMT’s toll road is a major route connecting the heart of Bangkok with Don Mueang International Airport. The toll road is also the gateway to Northern and Northeastern regions. Traffic volume on the toll road has grown steadily, climbing by an average of 7.5% per annum during 2013-2017. In the first half of 2018, traffic volume continued to grow by 2.6% year-on-year (y-o-y).
TRIS Rating forecasts traffic volume will increase by around 3% per annum during 2018-2019. The traffic volume may drop slightly in 2020 since the toll rate will rise by almost 14.3%. However, we assume the significant rise in the toll rate should offset the drop in traffic volume. We project DMT’s revenue will grow by 3% in 2018 and 2019 and by 13% in 2020.
Legal risk pressures the ratings
The legality of the latest amendment to the concession agreement (MOA3) remains the key issue that pressures the ratings of DMT. The court ruling in favor of the plaintiff may cause the concession to end in 2021 rather than in 2034.
MOA3 was made on 12 September 2007 pursuant to two Cabinet resolutions made on 11 April 2006 and 10 April 2007. MOA3 was a remedy to offset losses DMT incurred when actions taken by the government deviated from the concession agreement. The key amendments contained in MOA3 extend the maturity of the concession from 2021 to 2034 and pre-approve the toll fee increases suggested in the previous amendment.
Three legal cases were filed at the Administrative Court challenging the legality of MOA3. After years of court proceedings, the Supreme Administrative Court dismissed two of the three cases. In the remaining case, the plaintiffs claim that the Cabinet resolutions approving MOA3 were illegal. A ruling by the Central Administrative Court in 2015 revoked the Cabinet resolutions pertaining to MOA3. The case is now under consideration by the Supreme Administrative Court. However, DMT’s management remains confident of a positive outcome.
Reliance on a single cash-generating asset
DMT operates a single toll road. As a result, traffic volume is easily affected by event risks. For example, traffic volume significantly dropped during events like the financial crisis in 1997, the relocation of Bangkok’s international airport from Don Mueang to Suvarnabhumi, and the opening of a competing toll road. However, traffic volume on DMT’s toll road rebounded each time and has grown steadily since 2011. Looking ahead, we do not expect any significant unfavorable events to lower traffic volume substantially in the medium term.
Financial leverage will drop
Financial leverage has declined steadily over the past five years. The company’s net debt to capitalization dropped to 22.8% at the end of June 2018 from 51.5% in 2013. The company has no major capital expenditures in its pipeline. Over the next three years, the company has set normal capital expenditures of Bt420 million which will be financed by internal cash flow. The company is also interested in bidding on new expressway and motorway projects. However, the new projects are still under government consideration.
Due to the uncertainty over the court ruling outcome, DMT plans to repay all of its financial debts by the end of 2020. Based on its funds from operations (FFO) of around Bt2,000 million per annum, the company should be able to repay its outstanding debt of around Bt3,537 million by the end of 2020.
Satisfactory liquidity profile
The company’s liquidity position remains satisfactory. As of June 2018, DMT’s source of funds comprised cash on hand of Bt195 million and investments worth Bt682 million. We project the FFO will be around Bt2,000 million in the next 12 months. These sources of funds should be sufficient to cover the cash needed for debt service, investments, and dividends over the next 12 months. In 2018, DMT has to redeem outstanding debentures worth Bt800 million. Capital expenditures will be Bt173 million. DMT’s management expects to continue to pay dividends of around Bt1,000-Bt1,200 million per annum.
TRIS Rating believes DMT will comply with the debenture covenants over the next 12 to 18 months. The debt to equity ratio at the end of December 2017 was 0.8 times, below the debenture covenant of 2 times.
RATING OUTLOOK
The “stable” outlook reflects DMT’s stable and predictable operating performance and financial policies. Our base case scenario assumes DMT’s revenues will grow gradually to around Bt3,600 million in 2020. The FFO will be around Bt2,000 million per year. Since the company has no significant investments ahead, leverage is expected to decline steadily. From 2018 onwards, we forecast the FFO to total debt ratio will be greater than 80% and the EBITDA interest coverage ratio will be over 15 times.
RATING SENSITIVITIES
DMT’s ratings could be upgraded if the Supreme Administrative Court rules the MOA3 agreement is legal. On the other hand, a downgrade could be triggered by a significant drop in operating performance or a cash drain caused by excessive dividend payments. Either of these outcomes would materially reduce DMT’s ability to service its debt over the next three years.
COMPANY OVERVIEW
DMT was incorporated in 1988 by Dyckerhoff & Widmann A.G. of Germany and Delta Engineering Construction Co., Ltd. of Thailand. Currently, DMT’s major shareholders are the Phanichewa family (37%), AIF Toll Roads Holdings (Thailand) Ltd. (29%), and the Ministry of Finance (MOF) (25%).
The company received a 25-year build-transfer-operate concession from the department of highway (DOH) in April 1989 to construct and operate an elevated toll road, the Don Muang Tollway, situated above the Vibhavadi-Rangsit highway. The concession covers 15.4 kilometers (km.) of the original tollway section (Din Daeng-Don Muang) and 5.6 km. of the northern extension section (Don Muang-National Memorial Monument). The original tollway opened to traffic in December 1994, while the northern extension opened in December 1998. The combined cost of both sections was approximately Bt15,000 million. DMT's tollway is the gateway to the Northern and Northeastern regions.
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