MARC Ratings has affirmed Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) RM210.0 million Sukuk Murabahah rating at AA-_IS with a stable outlook.

The affirmed rating reflects Grand Sepadu’s stable performance, underpinned by resilient commercial traffic on its mature New North Klang Straits Bypass (NNKSB). The affirmation also reflects the improvement in leverage and coverage ratios driven by stronger revenue and reduced borrowings. 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.

Operating cash flow (CFO) was up around 8% in 2021 to RM42.3 million, strongest in the past five years. Cash flow coverage on interest and debt correspondingly 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). Free cash flow increased to RM39.2 million and cash to RM41.7 million at end-2021, supported by lower capex requirements and reduced dividend payment to RM3.0 million from RM17.0 million previously. On June 13, 2022, Grand Sepadu paid another RM30.0 million of its sukuk on maturity, leaving the outstanding balance at RM90.0 million as of the same date.

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. Our sensitised scenario indicates a minimum and average pre-distribution finance service cover ratio (FSCR) of 2.1x and 2.9x over 2022-2027, above the covenanted 1.75x. We also expect Grand Sepadu’s financial management, particularly with respect to dividend payment, to remain prudent to support organic deleveraging.