GRAND SEPADU (NK) SDN BHD - 2018 Credit Commentary Report

MARC has placed Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) sukuk rating on MARCWatch Developing. The MARCWatch placement follows the increased near-term uncertainty pending full clarity on the new government’s exact plans to deliver pre-election commitments on the scrapping of toll road charges. MARC will seek to resolve the MARCWatch Developing status once there is more clarity regarding the abolition of tolls from the government. (Please see MARC’s announcement on toll roads dated May 30, 2018.)

Grand Sepadu has a Sukuk Murabahah issuance of RM210.0 million. It is the toll concessionaire of New North Klang Straits Bypass (NNKSB) with the concession period for the highway expiring in 2032. The 17.5-km NNKSB has four toll plazas, namely Bukit Raja, Kapar, Kapar Westbound and Kapar Eastbound. For 2017, average daily traffic (ADT) on NNKSB declined by 0.9% y-o-y, mainly attributed to a 4.5% decline at the Bukit Raja Toll Plaza. Consequently, the highway achieved lower-than-projected actual ADT of 87,691 vehicles/day vis-à-vis projections of 90,674 vehicles/day. The Bukit Raja Toll Plaza, which contributes about 67.6% of NNKSB’s total traffic, saw more commuters diverting to competing highways to access residential areas in Meru and Kapar. In contrast, the average ADT on the three Kapar toll plazas recorded growth of 7.3% y-o-y, driven by improved commercial traffic volume to and from Northport.

Traffic volume at the Bukit Raja Toll Plaza picked up as at 1H2018, recording a y-o-y growth of 1.7% at ADT of 60,352 vehicles/day (1H2017: ADT59,330). This is reflected in Grand Sepadu’s higher unaudited revenue of RM23.3 million (1H2017: RM22.1 million). Coupled with higher other operating income, net profit experienced a turnaround, recording RM1.4 million compared to negative RM0.2 million in 1H2017. In line with better profitability, cash flow from operations (CFO) improved to RM12.7 million, leading to a higher CFO interest coverage of 2.40 times (1H2017: RM11.1 million; 2.10 times).

Under the base case assumption, the concessionaire’s minimum and average pre-distribution financial service coverage ratio (FSCR) are projected at 2.05 times and 3.45 times. The concessionaire’s debt repayment ability is deemed adequate as its cash and bank reserves of RM46.7 million appears sufficient to cover its remaining 2018 profit and 2019 principal payment of RM24.8 million. In June 2018, Grand Sepadu has also made its first principal sukuk repayment of RM20.0 million and profit payment amounting to RM5.3 million. Consequently, the concessionaire’s debt-to-equity (DE) ratio improve to 2.16 times in 1H2018 vis-à-vis higher shareholders’ funds of RM87.1 million. Notwithstanding the projected cash flow coverage, the concessionaire is expected to prudently manage its dividend distributions to maintain sufficient headroom.