MARC AFFIRMS ITS AAIS RATINGS ON WESTPORTS’S SUKUK ISSUANCES

Apr 19, 2012 -

MARC has affirmed its sukuk ratings of AA+IS on Westports Malaysia Sdn Bhd’s (Westports) Sukuk Muyarakah (Sukuk) Programme of up to RM2.0 billion and Sukuk Musyarakah Medium Term Notes (MTN) Programme of up to RM800 million. The rating outlook for both issues is stable. The affirmed ratings incorporate Westports’ strategic location and strong operational track record that has made it Port Klang’s leading terminal and a major local and transhipment hub, and the port’s fairly robust container volume throughput. Furthermore, Westports’ expansion programme will position the port operator strongly to attract and service the largest of post-Panamax vessels. These credit strengths are constrained by the company’s susceptibility to volatility in cargo volumes, whether as a result of downturns in global trade or fewer shipping lines calling on the port, client concentration, heavy capex programme and fairly aggressive dividend policy.

Westports continued to register strong growth in container throughput which rose to 6.4 million twenty-foot-equivalent units (TEU) in 2011 against earlier projections of 6.0 million TEU (2010:5.6 million TEU). Westports’ transhipment activity benefited from a pickup in the global trade along the Asia-Europe shipping route and growth in local import and export activity as a result of increasing trade between Malaysia and China. Westports’ competitive advantage over domestic and regional ports is derived from its strong operational efficiencies, Port Klang’s strategic location along one of the world’s busiest shipping routes and competitive pricing vis-à-vis its main competitor, Singapore Port.

The port operator posted a 14.4% increase in its revenue to RM1.12 billion for the financial year ended December 31, 2011 (FY2011); Westports’ pre-tax profit however, showed a 6.8% decline year-on-year to RM358.86 million. Westports’ cash flow from operations (CFO) improved marginally to RM444.2 million (2010: RM433.7 million); however, the company’s free cash flow turned negative, from positive RM234.6 million to negative RM345.5 million on the back of its expansion programme and a significant dividend payout in 2011. As at December 31, 2011, Westports’ balance sheet cash amounted to RM349.7 million after redeeming RM100 million of borrowings under its MTN programme in March 2011 with borrowing availability under existing credit facilities and the rated programmes at RM2.1 billion. Westports has also redeemed a further RM100 million of its MTN programme in March 2012. MARC believes that Westports’ liquidity profile will remain satisfactory in coming quarters in spite of its large planned capital spending in FY2012. Its capex of RM639.9 million on land reclamation works, construction of the second phase of Container Terminal 6 (CT6) and corresponding container yard and port machinery will be funded through additional borrowing of RM200 million, internally generated funds and the expected receipt of a government grant.

MARC expects Westports’ operating margin to remain under pressure over the next two financial years with the first phase of CT6 in ramp-up phase and construction of the second phase scheduled for completion by January 2013, in combination with the competitive pricing environment. Manpower costs, marketing rebates and fuel costs have been on the rise of late. The rating agency further notes that Westports is expected to operate at a higher level of leverage over the upcoming quarters on account of heavy capital expenditure and anticipated negative free cash flow. Of key importance to Westports’ credit quality will be the port operator’s ability to consistently generate the level of growth in containerised cargo volumes needed to offset the impact of increased debt taken to finance the port’s expansion and the incremental operating costs of CT6. MARC is somewhat concerned that weaker global growth could limit potential growth in container volume throughput in the coming quarters and constrain Westports’ ability to raise port tariffs as attracting and retaining traffic assumes top priority.

The stable outlook assumes that Westports’ will exhibit satisfactory container volume and revenue growth to maintain appropriate credit metrics for the current ratings. A significant departure from expectations could lead to downward pressure on the ratings.

Contacts:
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my;
Jason Kok, +603-2082 2258/ jason@marc.com.my;
Ahmad Tajuddin Yeop Adnan, +603-2082 2256/ tajuddin@marc.com.my.