View Credit Analysis Report (605389013)

Aid605389013
StatusPublished
CategoryReport
SubcategoryInfrastructure & Utilities - Toll Road
CoidGRANDSEPADU
Appoletid0
Date Article2021-07-21 00:00:00
PublicYes
TitleGRAND SEPADU (NK) SDN BHD - 2021
Content
Rating action     
MARC has affirmed Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) rating for its RM210 million Sukuk Murabahah Issuance at AA-IS with a stable outlook.

Rationale     
The affirmation reflects Grand Sepadu’s adequate cash flow coverage, underpinned by the relatively stable traffic performance of the New North Klang Straits Bypass (NNKSB). The rating also considers the concessionaire’s moderately leveraged capital structure. Moderating the rating are uncertainties on the implementation of the scheduled toll rate hikes and timing of government compensation in the event that the rate hikes are not granted. Additionally, as the NNKSB directly connects Northport to major industrial areas in the Klang Valley, a major economic slowdown could affect the highway’s performance.

Grand Sepadu is the toll concessionaire of the NNKSB, which has a concession period to 2032. The 17.5-kilometre NNKSB has four toll plazas, namely Bukit Raja, Kapar, Kapar Westbound and Kapar Eastbound. As expected, traffic volume fell 19% y-o-y in 2020 to 27.8 million while tolling revenue contracted by 12% to RM44.1 million due to COVID-19-related travel restrictions. However, the decline came in lower than our sensitised 23% and 20% drop in traffic volume and tolling revenue, respectively. The-better-than-expected traffic performance was supported by commercial traffic, particularly at the Kapar toll plaza that remained somewhat resilient in the face of the pandemic. Overall traffic volume at the Kapar toll plaza in 2020 recorded only a single-digit drop of 8% while that of heavy commercial vehicles, which made up 30% of the concessionaire’s tolling revenue, dropped by a smaller 3%.

Government compensation during the year remained on a regular cycle i.e. 50% of compensation from the preceding year and 50% from the current year. In 2020, Grand Sepadu’s total compensation receipt was RM17 million, up by RM4 million from the previous year.

As at end-2020, net cash flow from operations (CFO) was relatively stable at RM39.2 million. Free cash flow rose nearly 20% y-o-y to RM22.1 million due to the absence of heavy repair payments and lower dividend payout. Debt outstanding, consisted of only the sukuk, stood at RM150 million as the concessionaire pared down debts amounting to RM20 million in 2020. As such, the debt-to-equity (DE) ratio improved to 1.8x from 2.0x in the previous year. With a cash balance of RM39.1 million, Grand Sepadu has sufficient liquidity to service its financial obligations of RM37 million in 2021. 

Going forward, cash flow generation would be supported by a partial recovery in traffic volume and tolling revenue. We expect traffic performance in 2021 to be better than 2020 but lower than the pre-pandemic levels in 2019 based on the gradual pick-up in traffic volume at all toll plazas witnessed in 1Q2021 due to the relaxed travel restrictions. Traffic volume at the Kapar toll plaza, for example, has shown a strong rebound during the quarter with double-digit increases in most of the vehicle classes, suggesting a resumption of economic activities along the industrial corridor. 

Given that traffic volumes are tracking within Grand Sepadu’s base case projections, MARC’s sensitised scenario only assumes no toll hikes throughout the sukuk tenure and a one-year deferment in the government compensation receipt. 

Our sensitivity analysis over a three-year outlook indicates the followings:

  • Pre-distribution finance service coverage ratio (FSCR) under this scenario is projected to be above the covenanted 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, we expect Grand Sepadu to exercise discipline on its dividend distribution and manage its cash retention, ensuring that its liquidity and leverage metrics are not jeopardised.
Rating outlook     
The stable outlook reflects our view that the risk of a severe macroeconomic shock has eased compared to 2020, and business and traffic activities in 2021 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 given a still challenging operating environment 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
Moderately leveraged capital structure

Key Risks
  • Uncertainty in toll rate hike implementation and government compensation
  • Susceptibility of commercial traffic to industrial slowdown


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