GRAND SEPADU (NK) SDN BHD - 2022 |
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| Report ID | 6053890046809 | Popularity | 656 views 64 downloads | |||||
| Report Date | Jun 2022 | Product | ||||||
| Company / Issuer | Grand Sepadu (NK) Sdn Bhd | Sector | Infrastructure & Utilities - Toll Road | |||||
| Price (RM) |
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| Rationale |
Rating action MARC Ratings has affirmed Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) rating for its RM210.0 million Sukuk Murabahah rating at AA-IS with a stable outlook. As of June 13, 2022, outstanding balance of the sukuk stood at RM90.0 million. Rationale The affirmed rating reflects Grand Sepadu’s stable performance, underpinned by resilient commercial traffic on its mature New North Klang Straits Bypass (NNKSB) through the pandemic. The affirmation also reflects the improvement in leverage and coverage ratios driven by stronger revenue and reduced borrowings; cash flow coverage on interest and debt increased to 6.0x and 0.3x in 2021 (2020: 4.8x and 0.2x), while debt-to-equity (DE) ratio improved to 1.2x (2020: 1.8x). With a better economic outlook, cash flow could see more improvement and provide further deleveraging capacity. We project leverage to improve towards 0.9x by end-2022, assuming the current equity level, and to trend down in the following years through scheduled debt amortisation. Moderating the rating are uncertainties on the implementation of scheduled toll rate hikes and the timing of future government compensation, although it has been timely in the past. Additionally, as NNKSB directly connects Northport to major industrial areas in the Klang Valley, a major economic slowdown could affect the highway’s performance. Grand Sepadu operates NNKSB under a concession expiring in December 2032. The 17.5-km NNKSB has four toll plazas, namely Bukit Raja, Kapar, Kapar Westbound and Kapar Eastbound. Overall traffic on NNKSB reduced slightly further by 3.3% y-o-y in 2021 to 26.8 million vehicles after an 18.8% contraction in 2020 due to pandemic-related travel restrictions. The decline in traffic volume was mainly due to fewer passenger vehicles passing through the Bukit Raja toll plaza (-7.7%). Notwithstanding this decline, toll revenue grew 2.5% to RM45.2 million in 2021, supported by a 6.4% growth in commercial traffic at Kapar toll plaza. This, together with a higher compensation of RM19.8 million received during the year, underpins Grand Sepadu’s overall improved fiscal outturns. Kapar toll plaza — where the number of Class 3 vehicles and toll rates are highest — is NNKSB’s largest revenue contributor. Overall traffic in 1Q2022 has, nevertheless, begun to rise above the levels in 1Q2021 (+3.6%) and 1Q2020 (+3.0%), and has reached 90% of the pre-pandemic 1Q2019 level. With travel and border restrictions now fully lifted, we believe this will support an accelerating pace of recovery through 2H2022 and into 2023. 2021 was also the strongest year in the past five years for operating cash flow (CFO) for Grand Sepadu. It generated RM42.3 million of CFO in 2021, roughly 8% more than in 2020. Free cash flow increased to RM39.2 million and cash to RM41.7 million at end-2021, supported by lower capex requirements and a cut to dividend payment to RM3.0 million from RM17.0 million previously. We project Grand Sepadu to generate positive CFO of between RM43 million and RM48 million over the next three years on expectations that traffic could approach 90% of the pre-COVID 2019 level in 2022, and achieve a full recovery by 2023. This would support liquidity and provide Grand Sepadu the capacity for debt repayment. We also expect Grand Sepadu’s financial management, particularly with respect to dividend payment, to remain prudent to support organic deleveraging. Our sensitivity analysis, which also assumes no toll hikes throughout the sukuk tenure, indicates the following:
Rating outlook The stable outlook reflects our view that the risk of a severe macroeconomic shock has eased compared to 2021, and business and traffic activities in 2022 should show some rebound from last year’s low base. Accordingly, we expect the recovery in traffic volume and timely government compensations to continue and meet the base case projections. Rating trajectory Upside scenario A rating upgrade is not expected in the near term until the operating environment stabilises as downside risks related to the pandemic remain. Downside scenario The rating may be pressured if there is a sustained deterioration to the company’s financial metrics, which could arise, inter alia, from aggressive dividend flow and a weakening of management’s commitment to maintain the FSCR at a level meeting the financial covenant, or a material degradation of traffic and revenue expectations. Key strengths • Mature highway with resilient traffic profile • Improved leverage profile Key risks • Uncertainty in toll rate hike implementation • Susceptibility of commercial traffic to economic slowdown |
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