This article first appeared in The Edge Malaysia Weekly on April 28, 2025 - May 4, 2025

PACKAGE 1 of the East Klang Valley Expressway (EKVE), a 36.16km closed-toll highway connecting Sungai Long in Kajang and Ukay Perdana in Ampang, is expected to be completed by July this year, with toll collection slated to start in October, according to sources familiar with the project.

The 14.76km package from Sungai Long to Ampang runs through Hulu Langat in Selangor.

This should be good news for its concession holder Ahmad Zaki Resources Bhd (KL:AZRB), as the development of the highway has long been beset with delays, weighing on the group’s financials.

However, industry observers, including a banker The Edge spoke to, say even with the completion of the highway, AZRB will still face financial challenges.

As at Dec 31, 2024, the company’s loans and borrowings stood at RM2.79 billion, of which RM311.28 million were current. RM132.58 million of the current borrowings were the outstanding balance of a revolving credit facility.

Revolving credit usually carries higher interest rates than other types of loans.

According to AZRB, the revolving credit and murabahah facilities have profit rates ranging from 4.24% to 8.23%, and are repayable on demand. In comparison, its bank overdraft facilities bear interest rates of 4.85% to 8.06%.

In addition, it has over RM1.13 billion in term loans, which also carry relatively high interest rates. According to AZRB, for the financial year ended June 30, 2024 (FY2024), the group had seven term loan facilities, with outstanding balances ranging from RM3.85 million to RM611.39 million.

Notably, the bulk of the term loans, or RM611.39 million, is a government support loan with a fixed interest of 4.00% a year. The loan is repayable over 35 years commencing March 2021.

In addition, a term loan with an outstanding balance of RM169.53 million as at June 30, 2024 bears a rather high interest rate of 7.03% to 7.18% a year. According to AZRB, this loan was restructured and rescheduled in October 2023, with the principal repayment starting in February this year.

There are other term loans with interest rates as high as 9.15%.

The term loans are secured against shares in certain subsidiaries, freehold land and buildings, assignment of receivables, the debt services reserve account, project account and housing development account, as well as joint and several guarantees by certain directors of AZRB.

In FY2024, AZRB’s finance costs amounted to RM65.13 million, compared with an operational profit of RM147.41 million. This translates into an interest coverage ratio of 2.26 times.

However, much of the finance costs have actually been capitalised, as they were incurred for the development of assets, including the EKVE. Its total interest expense in FY2024 amounted to RM158.84 million, which was higher than its operating profit.

From a cash flow perspective, AZRB paid RM83.16 million in interest expense in FY2024, which reduced its interest coverage ratio to 1.77 times.

According to AskEdge,  as at end-December 2024, AZRB’s net gearing stood at a staggering 12.2 times, way above its peers that had net gearing ranging from zero to 0.5 times.

“I met them a year ago. Roughly speaking, their balance sheet looked stretched, if my memory serves me right,” says a construction sector analyst. No research firm covers AZRB.

The banker The Edge spoke to says: “What people are saying is not wrong,” in reference to AZRB’s tight financial situation.

When contacted, AZRB says the group is still feeling the impact of Covid-19 on its financial standing, especially with regard to its cash flow.

This was due to the fact that despite the significant interruption that the pandemic had on its operations, the group was still required to service its borrowing obligations, in particular those relating to the EKVE highway project.

“We continue to manage all of our loan obligations with the support and help of all our key lenders and stakeholders to ensure that we continue to meet our borrowing obligations whilst also meeting our cash requirements,” AZRB says.

The group adds that the EKVE will see marginal losses in the first few years of operation, due to the need to amortise the cost of the concession asset and expense the borrowing charges, until the traffic volume reaches a certain number.

AZRB says based on the traffic forecast provided by the project’s consultant, it expects its highway revenue to be between RM70 million and RM100 million in the first year of operations.

It adds that it continues to look at ways to restructure and strategise its balance sheet, while ensuring that doing so does not affect its value to its shareholders.

“Paring down borrowing and debts remains one of the crucial [ways] we are looking at,” the group states.

For FY2024, the construction and engineering segment contributed 56.4% to ­AZRB’s revenue of RM367.16 million, followed by oil and gas (20.94%) and its concession business (19.6%). The property business contributed the least, at RM12.34 million, or 3.36% of the total. The construction and engineering segment made a loss of RM44.82 million in FY2024, while the concession business, mainly made up of its operation of the Tok Bali Supply Base, made RM35.11 million in segmental profit during the year.

Given AZRB’s tight financial position, the group will be banking on the EKVE to generate cash.

The highway, which will serve as the final link of an outer ring road for Kuala Lumpur, was originally planned for completion in September 2019, four years after construction commenced in September 2015.

However, following several process design changes and issues involving the surrender of land and acquisition of privately owned land, the completion date was extended until July 15, 2022.

This target date was not met as the project was also delayed by the Covid-19 lockdowns, as well as stalled construction progress due to a lack of funding. The most recent extension was formalised by a fifth supplemental concession agreement, which extended the completion date by another year, to Dec 31, 2025.

While AZRB is not covered by any analysts, a RM1 billion guaranteed sukuk murabahah issued by its subsidiary and concessionaire EKVE Sdn Bhd (EKVESB) is rated by RAM Ratings. Maybank Islamic Bhd and Bank Pembangunan Malaysia Bhd have provided irrevocable and unconditional kafalah guarantees on the facility.

This has resulted in the sukuk being rated AAA(bg) with a stable outlook by RAM Ratings.

In a press release dated Aug 21, 2024, in explaining the rating, RAM Ratings said the transaction’s funding and liquidity positions were still critically tight, with the sukuk guarantee fees unpaid since July 2022, as EKVESB had managed to obtain the guarantors’ indulgence for delayed payments.

“Despite the liquidity constraints, there aren’t any adverse developments or events of default under the guarantees or the sukuk,” said RAM Ratings, noting that AZRB, the kafalah guarantors and the government remain committed to financially backing the project.

Typically, it takes time for traffic on a new highway to grow. So even with the completion of Package 1 of the EKVE, it remains to be seen if AZRB can improve its financial position in the near term. 

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