Rating action         

MARC Ratings has affirmed its rating of AA-_IS on Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) RM210.0 million Sukuk Murabahah. Concurrently, the rating outlook has been revised to positive from stable. As of end-May 2024, the outstanding balance of the sukuk stood at RM60.0 million.     

Rationale     

The outlook revision considers Grand Sepadu’s steadily improving leverage and coverage ratios, supported by a disciplined approach to dividend distribution. Its overall debt has continued to decline under the amortising structure to RM60 million as at end-May April 2024. Debt-to-equity (DE) ratio was lower at 0.5x while cash flow coverage on interest improved to a healthy 11.9x as at end-2023 (2022: 0.8x and 6.2x). We expect Grand Sepadu to maintain its disciplined approach to dividends and cash retention, which is anticipated to lead to strong credit metrics for an upgrade over the next 12-18 months.     

Moderating the rating are uncertainties on the implementation of toll rate increases and the timing of government compensation, although this has been timely in the past. There have also been instances in the recent past wherein the government had extended concession periods of highway operators in lieu of rate increases as well as government compensations. This may require operators to restructure their debts to be better aligned with cash flow generation going forward. Additionally, as the group’s highway — the New North Klang Straits Bypass (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 the 17.5-km NNKSB, which includes four toll plazas, namely Bukit Raja, Kapar, Kapar Westbound and Kapar Eastbound, under a concession expiring in December 2032. Following a strong recovery coming from the pandemic, traffic volume has returned to its normalised and mature growth trajectory. Average daily traffic (ADT) was up 3% y-o-y to 88,505 vehicles in 2023 and was stable y-o-y at 88,919 vehicles in 1QFY2024. Tolling revenue saw a modest increase to RM52.2 million in 2023 from (2022: RM51.3 million in 2022.). The Kapar toll plaza — where the number of Class 3 vehicles and toll rates are highest — remains NNKSB’s largest revenue contributor with 57% of the total tolling revenue.     

Under MARC Ratings’ sensitised case assuming normal annual traffic growth of 1%-1.5% (from 2024 onwards) and no toll hikes throughout the sukuk tenure, the projected finance service coverage ratio (FSCR) from 2024 to 2026 would be above the covenanted 1.75x. However, distribution of dividends in the same quantum as the base case could result in the FSCR breaching the covenant from 2027. In this regard, we expect Grand Sepadu to remain prudent and exercise discipline in its dividend distribution, ensuring that its liquidity and financial metrics are not jeopardised.     

Rating trajectory

Upside scenario     

Sustained financial performance, lower financial leverage, and management’s commitment to maintain a disciplined approach towards dividend distributions may support an upgrade over the next 12-18 months, which is reflected in the positive outlook.     

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