[RAM] RAM Ratings reaffirms AA2/Stable rating of Kesas' sukuk

RAM Ratings has reaffirmed the AA2/Stable rating of Kesas Sdn Bhd’s (the Company) RM735 million Sukuk Musharakah IMTN (2014/2023) (the Sukuk). The reaffirmation of the rating is based on our expectation that the Company will maintain its strong debt-servicing aptitude, underpinned by the mature traffic profile of the Shah Alam Expressway (SAE or the Expressway).

In 2019, the Government of Malaysia (GoM) - through Minister of Finance (Incorporated) or MOF Inc - announced its proposed acquisition of four highways (including the SAE) in which Gamuda Berhad owns majority stakes. The proposed takeover is ongoing, with MOF Inc and the concessionaires currently in negotiations. They aim to finalise the definitive agreements by end-February 2020 (extended from end-December 2019). The long stop date to fulfil the conditions precedent and complete the exercise will be mutually agreed upon among the parties involved. We highlight that the reaffirmation of Kesas’ sukuk rating is premised on the SAE’s performance, rather than the proposed takeover.

In FY Jul 2019, the SAE recorded a 1.6% decline in average daily traffic (ADT) to 321,493 vehicles, although this is milder than expected. The contraction was due to the continued migration of commuters to toll-free alternatives and competing infrastructure, including public transportation. Financially, Kesas’ free operating cashflow remained flush at RM208.3 mil; its finance service coverage ratio (FSCR) with cash balances and post-distribution came in at a healthy 2.80 times (fiscal 2018: 2.97 times). 

As at end-November 2019 (pursuant to a RM74 mil dividend payment earlier that month), Kesas’ FSCR stood at 2.34 times. RAM’s sensitised cashflow estimates that the Company will be able to distribute about RM26 mil more of dividends in FY Jul 2020 (base case: RM46 mil), to maintain a minimum FSCR of 2.25 times throughout the remaining tenure of the Sukuk. Any additional distribution will have to be supported by corresponding increases in traffic volume and cashflow. 

Kesas is entitled to two more toll rate increases under its concession agreement (CA). Although these are not likely to materialise (given the aforementioned proposed takeover and the GoM’s aversion to tariff hikes), our sensitised cashflow assumes that toll rates will increase in 2021 (+25% to RM2.50) and 2022 (+20% to RM3.00). This will lead to a further decline in traffic volume, with the Expressway’s ADT projected to average about 286,400 vehicles in fiscal 2020–2023 (base case: 334,000). Concurrently, we have assumed that the receipt of compensation payments (for the non-revision or delayed hike in tariffs assumed in our analysis) from the GoM will be delayed two years. Despite these sensitivities, Kesas’ debt-servicing ability is anticipated to remain intact, underpinned by an average pre-financing cashflow of about RM195 mil per annum (against RM375 mil of outstanding sukuk as at end-October 2019).  

Despite the assumption of slower compensation payments in our cashflow analysis, we highlight that Kesas has been promptly receiving compensation from the GoM in lieu of tariff increases, as per its CA. We believe that the GoM will continue to honour the compensation arrangement pending the completion of the proposed takeover. 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 particular time.    


Analytical contact
Davinder Kaur Gill
(603) 3385 2525
davinder@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my