Posted date: July 15, 2021

MARC has affirmed its rating of AA-IS on Grand Sepadu (NK) Sdn Bhd's (Grand Sepadu) RM210 million Sukuk Murabahah Issuance, with a stable outlook.

The affirmation reflects Grand Sepadu's adequate cash flow coverage and 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.

Grand Sepadu is the toll concessionaire of New North Klang Straits Bypass (NNKSB), which has a concession period until 2032. The 17.5-kilometre NNKSB has four toll plazas, namely Bukit Raja, Kapar, Kapar Westbound and Kapar Eastbound. In 2020, traffic volume fell 19% y-o-y 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 MARC's sensitised 23% and 20% drop in traffic volume and tolling revenue. The better-than-expected traffic performance was supported by commercial traffic that remained somewhat resilient in the face of the pandemic.

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, consisting of only the sukuk, stood at RM150 million as the concessionaire pared down debts thus improving the debt-to-equity (DE) ratio to 1.8x (end-2019: RM2.0x). With a cash balance of RM39.1 million, Grand Sepadu has sufficient liquidity to service its financial obligations of RM37 million in 2021. Additionally, the collection cycle of government compensation remained regular, 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.

Travel restrictions imposed to fight the coronavirus pandemic weighed on overall traffic in 2020, with travel volumes on NNKSB decreasing by 18.6% y-o-y. However, we note that commercial traffic, which generates around 50% of Grand Sepadu's tolling revenue, has been more resilient to the impact of the pandemic, decreasing by less than 8% in 2020. Commercial traffic has also rebounded strongly in 1Q2021 above the pre-pandemic levels, up by 22.1% against the same corresponding period last year and by 10.8% versus 1Q2019.

However, due to the still uncertain evolution of the pandemic, we have — under our sensitised case — assumed traffic to recover to 90% in 2021 and 98% in 2022, all relative to 2019's levels. Under this scenario, coupled with no toll hikes throughout the sukuk tenure and a one-year deferment in government compensation, pre-distribution finance service coverage ratio (FSCR) is projected to still remain above the covenanted 1.75x for the next three years. However, distribution of dividends in the same quantum as assumed by management would cause the FSCR to breach the covenant. In this regard, MARC expects Grand Sepadu to exercise discipline in its dividend distribution and manage its cash retention, ensuring its liquidity and leverage metrics are not jeopardised should there be traffic underperformance.

Ummi Kalsom Yaacub, +603-2717 2934/ ummikalsom@marc.com.my;
Ahmad Ikmal Mohd Shahril, +603-2717 2963/ ikmal@marc.com.my;
Hafiza Abdul Rashid, +603-2717 2955/ hafiza@marc.com.my.