Published on 02 Dec 2021.
RAM Ratings has reaffirmed the AA2/Stable rating of Kesas Sdn Bhd’s (the Company) RM735 mil Sukuk Musharakah Islamic Medium-Term Notes (2014/2023) (the Sukuk). The reaffirmation of the rating is based on our expectation that the Company will maintain its robust cashflow, underscored by the established traffic profile of the Shah Alam Expressway (SAE or the Expressway) and strong recovery in traffic post-pandemic.
Prolonged movement restrictions significantly reduced the SAE’s traffic volumes in FY Jul 2021. The weaker traffic volume led to a decline in toll revenue of RM72 mil in FY Jul 2021 as compared to FY Jul 2019 (pre-pandemic). However, we expect a strong rebound in traffic as movement restrictions have eased considerably. The Expressway’s average daily traffic (ADT) rebounded 38% m-o-m to 224,000 vehicles in September 2021 as the Klang Valley entered Phase 2 of the National Recovery Plan.
Our cashflow projections caps ADT recovery to 95% of pre-pandemic levels, which is in line with the level of traffic observed in September 2020 during the Recovery MCO phase. This limit takes into account some weakness in traffic prior to the pandemic, namely the migration to public transportation and alternative roads that run parallel to the SAE. We also assume a one-year delay in the receipt of compensation payments from the Government of Malaysia (GoM), with toll rate hikes scheduled for 2023. Though unclear if a toll rate hike at the Expressway is plausible, we have stress-tested the SAE’s traffic and cashflow resilience should it occur.
We expect Kesas’ minimum finance service coverage ratio (FSCR) to remain strong at 2.25 times up to the Sukuk maturity on 10 August 2023. This FSCR level remains commensurate with the rating threshold of AA2 RAM-rated expressways. On the latest payment date of 8 October 2021, Kesas’ FSCR stood at 2.66 times (with cash balances, post-distribution), supported by its healthy average annual pre-financing cashflow and sizeable cash reserves.
Although we assume delayed compensation payments in our cashflow analysis, we highlight that Kesas has been receiving compensation promptly from the GoM in lieu of tariff increases, as per its concession agreement. We believe the GoM will continue to honour the compensation arrangement in the event of non-revision of toll rates. As with most concession-related projects, Kesas is inherently exposed to single-project risk, although the entire stretch of the SAE is unlikely to be disrupted at any one time.
In May 2021, Gamuda Bhd (Gamuda), which owns 70% of Kesas through Kesas Holdings Berhad, announced it was in talks with the government to sell its four highway concessions (including the SAE) to a private highway trust. Under Gamuda’s proposal, toll hikes will be waived in exchange for an extension to the concession tenures. As the proposal has yet to be finalised, we did not factor this outcome into our rating. We will continue to monitor these developments and reassess when more details are made known.
Lee Yee Von
(603) 3385 2503
Davinder Kaur Gill
(603) 3385 2525
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