The affirmed ratings factor in the strong competitive position of Kesturi’s highways, namely Duta-Ulu Kelang Expressway Phase-1 (DUKE 1) and Phase-2 (DUKE 2), which have easy accessibility and wide connectivity to major roadways in the Klang Valley, as well as the long remaining life of the concession ending in August 2059, with an option to extend for another 10 years. For the nine months ending March 2022 (FY2022), traffic volume came in higher than expected, recovering to above the FY2021 level and about 90% of the FY2020 level. We expect traffic volumes to normalise on the back of the receding impact of the COVID-19 pandemic and the country’s transitioning to the endemic phase.

Accordingly, the improvement in traffic volume has eased the pressure on the senior financial service cover ratio (FSCR) and is the basis of our outlook revision to stable. Under our sensitised case, Senior FSCR with cash is projected to improve to 1.8x in FY2023, above the covenanted 1.75x. The projection assumes full recovery in FY2023 to FY2019 level, supplemented by the receipts of the outstanding government compensation totalling RM115.8 million that would be received in FY2022 and FY2023. On a longer term, however, the highly leveraged capital structure and the sukuk’s step-up repayment arrangement would weigh on its liquidity position. Any weaker-than-projected traffic volume would impact the FSCR. 

 

We note that Kesturi, which is 60%-owned by Ekovest Berhad via Nuzen Corporation Sdn Bhd with the remaining 40% held by the Employees Provident Fund (EPF), has adequate near-term liquidity. With projected operating cash flow of RM115 million for July–December 2022, we view liquidity to be sufficient to meet its Senior Sukuk’s financial obligations of RM171.8 million on December 2, 2022.

The outlook revision to stable reflects signs of traffic level stabilisation and low likelihood of further government movement control measures, which should lessen operational and financial risks.

A rating upgrade is unlikely in the near term as it would require a material improvement in the business and financial profile. 

A sustained deterioration in the operating environment could negatively affect the ratings, especially if this impacts traffic levels and credit metrics.