Posted Date: May 11, 2017
MARC has affirmed the AA-IS rating on Grand Sepadu (NK) Sdn Bhd's (Grand Sepadu) Sukuk Murabahah issuance of RM210 million. The outlook on the rating is stable. Grand Sepadu is indirectly equally owned by Taliworks Corporation Berhad and the Employees Provident Fund with a 37.5% stake each.
The affirmation reflects Grand Sepadu's adequate cash flow coverage, underpinned by stable traffic performance on the New North Klang Straits Bypass (NNKSB). The rating also considers the concessionaire's moderately leveraged capital structure. Moderating the rating are the uncertainties on the implementation of the scheduled toll rate hikes and timing of government compensation. Additionally, as the NNKSB directly connects Northport to major industrial areas in Klang Valley, any slowdown in operations at Northport will affect the highway's performance.
Grand Sepadu is the toll concessionaire of the NNKSB. The concession period for the highway expires in 2032. The 17.5-kilometre NNKSB has four toll plazas, namely Bukit Raja, Kapar, Kapar Westbound and Kapar Eastbound. Average daily traffic (ADT) on the NNKSB grew marginally by 0.9% year-on-year (y-o-y) in 2016 due to a 2.7% decline y-o-y at the Bukit Raja toll. The traffic volume at the Bukit Raja toll, which accounts for 70% of NNKSB's total traffic, declined as commuters diverted to competing highways to access residential areas in Meru and Kapar. In contrast, the ADT on the three Kapar tolls recorded growth of 10.4% y-o-y, driven by improved commercial traffic volume to and from Northport as a result of better highway signage. Nonetheless, the highway achieved lower-than-projected actual ADT of 88,528 vehicles/day vis-à-vis projections of 89,956 vehicles/day.
In 2016, Grand Sepadu recorded unaudited revenue of RM47.9 million (2015: RM41.7 million), including toll compensation from the government amounting to RM3.77 million (2015: nil). Consequently, net profit for the year rose to RM3.1 million, a turnaround from its loss of RM0.9 million in the previous year. Cash flow from operations (CFO), however, remained flat at RM24.4 million after the company pared down its trade payables during the year. The concessionaire's CFO interest coverage stood at 2.28 times (x) (2015: 2.36x). As at end-December 2016, its cash and bank balances of RM32.2 million are sufficient to cover its profit payment in June 2017 of RM10.5 million. The first principal repayment of RM20 million will be in June 2018.
Under the base case scenario, Grand Sepadu's annual free cash flow averages at RM44.4 million from 2017 until 2027 against average annual financing obligations of RM24.6 million. Assuming zero distributions, MARC's sensitivity analysis shows that Grand Sepadu's cash flow coverage remains adequate under stressed scenarios. The highway can withstand up to a 5% reduction in traffic growth and absence of government compensation for toll hike deferral in 2017 to register a minimum pre-dividend finance service coverage ratio (FSCR) of 1.84x. Traffic volume would need to register a 9% decline before the concessionaire breaches its covenanted FSCR of 1.75x in 2020. Notwithstanding the projected cash flow coverage, MARC expects the concessionaire to prudently manage its dividend distributions to maintain sufficient headroom against any underperformance and/or unbudgeted outlays.
The stable outlook is premised on MARC's expectations of stable traffic performance and cash flow generation on the NNKSB. The rating would come under pressure if there is significant downward deviation in Grand Sepadu's traffic performance. In addition, prolonged toll hike deferrals without timely compensation from the government and/or an aggressive dividend payout policy would negatively affect the rating and/or its outlook.
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