MARC Ratings has affirmed Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) RM210.0 million Sukuk Murabahah rating at AA-_IS with a stable outlook. As of June 15, 2023, the outstanding balance of the sukuk stood at RM60.0 million. 

The rating affirmation reflects Grand Sepadu’s stable performance, supported by resilient commercial traffic on its mature New North Klang Straits Bypass (NNKSB), improved leverage and coverage ratios driven by stronger revenue and reduced borrowings. Cash flow coverage on interest and debt increased to 6.2x and 0.32x in 2022 (2021: 6.0x and 0.30x), while debt-to-equity (DE) ratio improved to 0.8x (2021: 1.2x). As of mid-June 2023, DE ratio improved further to 0.5x after the scheduled sukuk repayment of RM30.0 million on June 12, 2023. Given a better operating environment, cash flow could see more improvement and provide further deleveraging capacity. We expect Grand Sepadu’s continued deleveraging to be supported by volume growth and increases in cash flow from operations (CFO), estimated at around RM48 million to RM72 million over the next three years.

Moderating the rating are uncertainties on the implementation of scheduled toll rate hikes and the timing of future government compensation, although it has been timely in the past. As has also been seen in the recent past, there have been occurrences of the government extending concession periods of highway operators in lieu of toll hikes as well as government compensations. This may necessitate operators to restructure their debts to better match their concessions and liabilities. Additionally, as NNKSB directly connects Northport to major industrial areas in the Klang Valley, a major economic slowdown could affect the highway’s performance.

Grand Sepadu operates NNKSB under a concession expiring in December 2032. The 17.5-km NNKSB has four toll plazas, namely Bukit Raja, Kapar, Kapar Westbound and Kapar Eastbound. Overall traffic performance in 2022 and 1Q2023 was strong, with average daily traffic (ADT) increasing 17.2% y-o-y to 86,059 vehicles in 2022 and further by 6.4% y-o-y to 87,984 vehicles in 1Q2023. Total revenue, including toll and government compensation, had also increased almost 13% y-o-y, from RM65.0 million in 2021 to RM73.2 million in 2022. Kapar toll plaza — where the number of Class 3 vehicles and toll rates are highest — remains NNKSB’s largest revenue contributor.  

The projected finance service coverage ratio (FSCR) between 2023 and 2024 under MARC Ratings’ sensitised case, which assumes traffic growth at a normal and mature rate circa 1%-1.5% p.a. (from 2024 onwards) and no toll hikes throughout the sukuk tenure, stands at above the covenanted 1.75x. However, distribution of dividends in the same quantum as assumed by management in the base case could result in the FSCR breaching the covenant from 2025. In this regard, we expect Grand Sepadu to remain prudent and exercise discipline in its dividend distribution, ensuring that its liquidity and financial metrics are not jeopardised. 

The stable outlook reflects the improvement in traffic volume as well as NNKSB’s demonstrated mature and stable traffic profile. 

An upgrade could be considered if there is significant further strengthening of traffic performance and maintenance of consistently robust financial metrics. 

The rating may be pressured if there is a sustained deterioration to the company’s financial metrics, which could arise, inter alia, from aggressive dividend flow and a weakening of management’s commitment to maintain the FSCR at a level meeting the financial covenant, or a material degradation of traffic and revenue expectations.