CREDIT ANALYSIS REPORT

KONSORTIUM LEBUHRAYA UTARA-TIMUR (KL) SDN BHD - 2020

Report ID 605279 Popularity 244 views 20 downloads 
Report Date Oct 2020 Product  
Company / Issuer Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd Sector Infrastructure & Utilities - Toll Road
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Rationale
MARC 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 three-notch rating differential between the Senior Sukuk and Junior Bonds reflects the latter’s subordination to the Senior Sukuk with regard to security ranking and payment priority. The outlook on the ratings is stable. The company operates two highways, the 18-km DUKE Phase 1 (DUKE 1) linking eastern and western Kuala Lumpur (KL), and DUKE Phase 2 (DUKE 2) that comprises two elevated carriageway links, namely the 9-km Tun Razak Link and the 7-km Sri Damansara Link. 

The ratings are supported by MARC’s view of the highways’ relatively strong competitive position with easy accessibility to a wide network of major roadways as well as the company’s amortising debt structure and resilient, albeit softening, debt metrics. Kesturi’s liquidity position is comfortable throughout FY2021 to offset the expected short-term revenue shortfall. With cash of around RM182 million as at end-June 2020 and an operating cash flow projected at around RM157 million for FY2021 (MARC’s sensitised case), Kesturi should be able to meet its sukuk principal of RM50 million due in December 2020 and its semi-annual profit payments totalling RM108 million payable in June and December 2021. 

The outbreak of COVID-19 and related government containment measures including the Movement Control Order (MCO) have hit traffic numbers quite heavily, particularly in the peak lockdown months of April and May 2020. Average daily traffic (ADT) was down 51.1% in the four months following implementation of the MCO (i.e. March – June 2020) from the level eight months prior (i.e. July 2019 – February 2020). This has led to an overall 12.6% decline in the annual ADT in FY2020.

However, as movement restrictions gradually eased, there have been signs of traffic recovery, with traffic rising sharply in June 2020 (the beginning of the Recovery MCO) compared to April, although it is still 24% below the level in June 2019. Given the current decline in volumes, and in view that the COVID-19 situation can still evolve as economic activity and government restrictions respond to ongoing developments, we have revised our sensitised case. We project traffic volumes to contract 20% in FY2021 and full recovery to 2019 volumes only in 2022. We have also assumed a three-year delay in toll hikes from their scheduled dates as provided in the concession agreements (CA), as well as a one-year delay in the receipt of related government compensation. This sensitivity case results in an average Senior financial service cover ratio (FSCR) of 1.9x over the next three years, above the covenanted 1.75x. FSCR could ease to below 1.75x between FY2025-FY2027, before increasing to about 1.8x in FY2028, supported by toll rate increases. 

MARC also conducted a breakeven analysis to determine the minimum traffic volume necessary over the next three years to maintain the FSCR at 1.75x assuming no toll increase and a one-year deferment in the receipt of toll compensation. Under these assumptions, Kesturi can withstand up to a 25% reduction in traffic volume in FY2021 from FY2019 but will require a strong 60% growth in FY2022 (or a 20% increase against FY2019). For FY2023, it needs a minimum 3% growth y-o-y. Without toll compensation, FSCR will fall below 1.75x but it is expected to remain above 1.0x over the three-year outlook period. 

Major Rating Factors

Strengths
Easy accessibility to and fro a wide network of major roads;
Amortising debt structure congruent with forecast cash flows; and
Long remaining life of extended concession. 

Challenges/Risks
Highly leveraged capital structure;
Peak-hour traffic bottlenecks could hinder future traffic growth; and
Toll rate hike deferral could weigh on project cash flows at later stage.

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