View Credit Analysis Report (605231)

Aid605231
StatusPublished
CategoryReport
SubcategoryInfrastructure & Utilities - Toll Road
CoidGRANDSEPADU
Appoletid0
Date Article2020-08-18 00:00:00
PublicYes
TitleGRAND SEPADU (NK) SDN BHD - 2020
Content
MARC has affirmed its rating of AA-IS on toll road concessionaire Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) RM210 million Sukuk Murabahah. The rating outlook has been revised to stable from negative.

The government has been honouring its compensation obligations, albeit  with some delays, bringing greater visibility and stability to cash flow.  MARC had previously placed the rating on negative outlook on uncertainties surrounding the timing of their collection. The revised outlook reflects MARC’s expectation that Grand Sepadu will demonstrate steady operating performance, underpinned by the stable traffic profile of its mature 17.5-km New North Klang Straits Bypass (or NNKSB). It also takes into consideration Grand Sepadu’s liquidity profile that is expected to remain adequate over the next 12-18 months even under MARC’s downside scenarios, which include assumptions of no toll hikes, a one-year delay in government compensation and a reduction to topline taking into account the challenge posed by the coronavirus outbreak and the Movement Control Order (MCO) imposed as a result. In this regard, a prolonged pandemic, extended MCO period and traffic underperformance beyond our sensitised case, as well as a delay in receipt of compensation further than MARC’s assumed timeframe, could exert a downward pressure on the rating and/or outlook.  

The affirmed rating reflects the importance of NNKSB, evidenced by its long-term growing, albeit modest, traffic volume. The highway provides important transportation links to the industrial and surrounding areas in Klang. The rating also incorporates Grand Sepadu’s adequate cash flow coverage and moderately leveraged capital structure.

Traffic volume has grown at CAGR of 1.25% for the 2015-2019 period, demonstrating the matured profile of the highway. Both passenger and commercial traffic have shown growth, with the exception of taxis. Taxi traffic flows had contracted about 15.2% over the same 5-year period, partly attributable to the popularity of e-hailing services particularly in recent times. However, the effect of the drop is not significant as taxis account for less than 1% of Grand Sepadu’s total traffic volume. The highway benefits from a passenger vehicle base that accounts for approximately 83% of total traffic, and commercial vehicles that contribute the bulk of toll revenue (specifically Kapar toll plaza). In this regard, Grand Sepadu’s toll revenue is vulnerable to a slowdown in industrial activities affecting commercial traffic.

The company posted toll revenue of RM50.3 million in fiscal 2019, up 4.9% y-o-y. 2019 total revenue (comprising actual toll collection) rose stronger at 21.6% y-o-y to RM63.4 million. We observe that collection of toll compensation has returned to normal after a delay in payment for year 2018. The compensation for 2018 has been received last year while 50% of the compensation due in 2019 was also received in that year. Collection is thus back to the regular cycle, i.e. 50% of compensation is received in the current year with the other half in the following year. 

Debt outstanding - consisting of only the sukuk - stood at about RM170.0 million as at end-2019, down from RM190.0 million the year before. As a result, debt-to-equity (DE) ratio improved to 2.0x (2018: 2.1x), and we expect this to continue reducing considering limited new capital requirements and no additional borrowings planned over fiscal years 2020-2027. 

While results were generally good in 2019, 2020 looks to be a challenging year against the backdrop of the COVID-19 outbreak and the consequent MCO. The events have caused traffic to fall steeply, with volume and toll revenue down by about three-quarters in the first two weeks of the MCO. However, traffic in the following weeks have picked up gradually with the easing of the MCO. By the week of July 28, 2020, volume and toll revenue were down by just 1% from the week prior to the MCO date. 

Amid the current fragile economic environment, our downside scenarios are focused on 2020 and 2021, and Grand Sepadu’s liquidity position. Our stressed scenarios indicate the following:

  • Under MARC’s sensitised scenario, toll revenue could reduce by about RM10 million in 2020, or by 20% from 2019. Financial Service Cover Ratio (FSCR) under this scenario, assuming no toll increase and a one-year deferment in the receipt of toll compensation, is projected to still be above the covenanted 1.75x. 

  • Assuming no dividend distribution, toll revenue could withstand up to a 40% decline in 2020, with the FSCR maintained at 1.75x. 

  • Distribution of dividends in the same quantum as assumed by management in the base case would result in the FSCR breaching the covenanted 1.75x under our sensitised case. In this regard, MARC expects Grand Sepadu to exercise discipline on its dividend distribution and manage its cash retention, ensuring its liquidity and leverage metrics are not jeopardised.

Major Rating Factors

Strengths
Mature highway with resilient traffic profile; and
Moderately leveraged capital structure.

Challenges/Risks
Uncertainty in toll rate hikes and timing of government compensation;
        and
Susceptibility to a slowdown in industrial activities that may affect
        commercial traffic, i.e. Grand Sepadu’s major revenue producer.
 


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