GRAND SEPADU (NK) SDN BHD - 2016

MARC has affirmed its AA-_IS rating on Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) issuance of RM210.0 million Sukuk Murabahah. The outlook on the rating is stable. Grand Sepadu is the concessionaire of the New North Klang Straits Bypass (NNKSB) expressway until 2032. The 17.5km expressway has four toll plazas namely Kapar, Kapar Westbound, Kapar Eastbound and Bukit Raja. Grand Sepadu is indirectly equally owned by Taliworks Corporation Berhad (Taliworks) and the Employees Provident Fund (EPF) with a 37.5% stake each.

The rating takes into consideration the concessionaire’s adequate cashflow coverages, supported by the resilient traffic performance on the NNKSB which has a mature and fairly stable profile. The rating also factors in the NNKSB’s higher capacity as compared to alternative routes and the concessionaire’s moderately leveraged capital structure. Moderating the rating are uncertainties associated with the scheduled toll rate hikes and timing of government compensations to maintain its debt service coverage levels. In addition, traffic on the NNKSB is also susceptible to any slowdown in operations at North Port and industrial activities. The NNKSB provides direct connectivity between North Port and major industrial areas in Klang Valley.

For 2015, the NNKSB registered 0.25% year-on-year (y-o-y) growth with average daily traffic (ADT) of 87,746 vehicles; this however, was 2.1% below projections, mainly due to a drop in Class 3 and 5 vehicles at the Bukit Raja toll. Offsetting the decline was the higher number of Class 5 vehicles at the Kapar and Kapar Westbound toll plazas due to newly-built workers’ quarters in the Kapar area. The growth in traffic volume at the Kapar toll plazas coupled with sufficient liquidity headroom, are expected to provide a buffer against traffic underperformance.

For 2015, Grand Sepadu recorded toll revenue of RM41.7 million, 1.7% lower from the projected RM42.4 million. The contribution was mainly from the Bukit Raja and Kapar toll plazas which contributed 35.8% and 44.5% of total revenue respectively. Despite incurring higher-than-expected routine maintenance expenses, the company’s operating profit of RM14.0 million was 7.5% above projection on the back of lower administrative expenses. This, coupled with lower finance costs, contributed to better profit before tax of RM2.8 million. Cash flow from operations (CFO) was negative after the unused advances of RM75.0 million were refunded to its parent prior to the sukuk issuance. Adjusting for the refund, CFO would have stood at RM24.2 million. As at end-December 2015, Grand Sepadu’s cash and bank balances of RM28.1 million are sufficient to cover its existing financial obligations of RM11.2 million in 2016 while its current debt-to-equity ratio of 2.84 times is well below the covenanted 4.50 times.

MARC notes with some concern that Grand Sepadu has yet to receive government approval to implement the toll rate hikes which were scheduled for January 2016. The toll charges are expected to increase by between 10 sen to RM1.20 and are not expected to negatively impact the NNKSB given the capacity constraints of alternative non-tolled roads. Nonetheless, the traffic flow of commercial vehicles which constituted 13.7% of the NNKSB's traffic volume in 2015 (2014: 14.0%) could be affected given its higher elasticity to toll rate hikes.

In respect of cash flow projections under the base case, the concessionaire will have an average annual free cash flow of RM20.7 million from 2016 till 2027. MARC’s sensitivity analysis shows that Grand Sepadu’s cash flow is able to withstand toll hike deferrals but is more susceptible to traffic volume growth. Traffic volume would need to fall by 4.2% before the covenanted finance service coverage ratio (FSCR) of 1.75 times is breached in 2023. Grand Sepadu would still remain current on its debt service obligations with a minimum FSCR of 1.87 times under a highly stressed scenario of 3% traffic volume reduction and toll hike deferrals throughout the sukuk tenure.

The stable outlook incorporates MARC’s expectations that the concessionaire will generate stable cash flows to service the sukuk. However, the rating would come under pressure if there is significant downward deviation in Grand Sepadu’s traffic performance. In addition, prolonged toll hike deferrals without timely compensations from the government and/or an aggressive dividend payout policy would negatively affect the rating.

Major Rating Factors

Strengths

• Mature highway with resilient traffic profile;
• Limited alternative routes with equivalent capacity; and
• Moderately leveraged capital structure.

Challenges/Risks

• Uncertainty in toll rate hikes and timing of government compensation;
• Susceptibility of traffic performance to port operations; and
• Vulnerability to significant downward deviation in traffic volume.