MARC Ratings has affirmed its AA-_IS and A- ratings on Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd’s (Kesturi) RM2.3 billion Sukuk Musharakah (Senior Sukuk) and RM180 million Redeemable Secured Junior Bonds (Junior Bonds). The outlook on both ratings is stable. The rating differential between the Senior Sukuk and Junior Bonds reflects the latter’s subordinated status. 

Kesturi is owned by Ekovest Berhad (60% via Nuzen Corporation Sdn Bhd) and the Employees Provident Fund (EPF) (40%). It operates the Duta-Ulu Kelang Expressway Phase 1 (DUKE 1) and Phase 2 (DUKE 2) with a total length of 34 kilometres. 

The affirmed ratings reflect the resilience of traffic on Kesturi’s mature and strategically-located highway network. The highways intersect with other major highways in the Klang Valley, linking well-established, densely populated areas—including Damansara, Mont Kiara, Sri Hartamas, Ulu Kelang and Setiawangsa—with Kuala Lumpur’s city centre. The ratings also consider the long-term maturity (35 years remaining) of Kesturi’s Concession Agreement (CA) that ends in August 2059 (with an option to extend for another 10 years). Moderating the ratings, however, is Kesturi’s leveraged capital structure.

In FYE June 30, 2023 (FY2023), traffic volume saw a marked increase. Average annual daily traffic (AADT) on DUKE 1 and DUKE 2 combined rose to 223,089 vehicles, 33.5% above FY2022’s level and 15.6% higher than the pre-pandemic FY2019 level. Traffic volumes continued to show strength in FY2024, with AADT increasing further to 235,618 vehicles in the first six months from July to December 2023, above FY2023’s level by 5.6%. Traffic volumes in FY2023 and 1HFY2024 were also 1.9% and 6.1% above MARC Ratings’ rating case. 

DUKE 1 has exhibited resilient traffic growth since it opened in 2009. Traffic registered a 1.25% compound annual growth rate (CAGR) in the past six years, a slow but steady growth that reflects a stable and mature asset. DUKE 1’s AADT reached 139,227 vehicles in FY2023, representing a 33.8% annual growth from FY2022 and a 105% recovery from the pre-pandemic FY2019 level. In 1HFY2024, traffic improved further to an AADT of 146,515 vehicles, representing a growth of 5.2% compared to FY2023. 

DUKE 2 is younger (opened in October 2017) but its traffic volume is growing rapidly. AADT improved to 89,103 vehicles in 1HFY2024, 6.2% above FY2023’s level and 47% above FY2019’s level. 

Kesturi’s coverage metrics are strong. Under MARC Ratings’ sensitised scenario assuming flat traffic, no toll hike over the remaining life of the sukuk and a one-year delay in government compensation, minimum senior finance service coverage ratio (Senior FSCR) is projected to be 1.79x, with an average of 3.80x from FY2024 to FY2034, meeting the covenanted 1.75x.

The rating agency highlights that there could be occasions where Senior FSCR may drop below the covenant if receipt of toll compensation takes longer than expected as was the case in FY2023 when Senior FSCR was 1.60x. MARC Ratings views this as a timing issue and believes that Kesturi’s credit fundamentals remain strong, underpinned by resilient traffic demand; traffic volumes tracked positive over the last 15 years bearing moderate reductions in 2020 and 2021 due to the pandemic. MARC Ratings has conducted a breakeven analysis of the base case, showing traffic volumes could fall around 40% overall over the remaining sukuk tenure, and still meet its financial obligations (Senior FSCR of 1.0x), indicating a relatively strong tolerance against adverse scenarios.

There was a slight reduction in debt over the review period. As at end-December 2023, total debt was RM2.0 billion, down from RM2.1 billion as at end-2022 following a RM140 million sukuk repayment in December 2023. Correspondingly, debt-to-equity (DE) ratio improved to 10.8x as at end-December 2023, from 12.2x as at end-June 2023 and 22.3x as at end-June 2022. MARC Ratings expects Kesturi’s leverage to improve gradually, but remain elevated, from debt reduction (sukuk is fully amortising) and profit growth (traffic is on a positive trajectory).

Liquidity is adequate based on the company’s cash balance (RM73.8 million as at end-December 2023) and expected cash flow from operations (CFO) generation of around RM355 million in calendar year 2024. MARC Ratings believes Kesturi has sufficient liquidity to cover the sukuk’s upcoming profit payment of RM88.7 million and principal repayment of RM160.0 million on December 2, 2024. The rating agency views that the concessionaire also has reasonable financial flexibility; the long concession life provides a 26-year tail after sukuk maturity (excluding the option to extend by another 10 years), which could facilitate refinancing, if required.

The stable outlook reflects MARC Ratings’ expectation of continued steady traffic performance on the concessionaire’s road network. 

A rating upgrade is unlikely in the near term. Over the longer term, the rating agency could upgrade the ratings if there are material improvements in Kesturi’s business and financial profiles. 

A material worsening of traffic performance against MARC Ratings’ expectations with adverse impact on credit metrics could lead to negative rating action.