MARC DOWNGRADES TANJUNG LANGSAT PORT’S RATINGS TO BBB+IS and MARC-3 ID / BBB+ ID; OUTLOOK NEGATIVE

Nov 14, 2012 -

MARC has downgraded its ratings on Tanjung Langsat Port Sdn Bhd’s (TLP) RM250.0 million Sukuk Musyarakah Bonds and RM135.0 million Musyarakah Commercial Papers/Musyarakah Medium Term Notes Programme (MCP/MMTN) to BBB+IS and MARC-3ID/BBB+ID from A-IS and MARC-2ID/A-ID respectively. The outlook on the ratings remains negative.

The rating action reflects TLP’s continued losses and weak cash flow arising from a delay in the commencement of TLP's port operations which has resulted in erosion of its shareholders’ funds and heavy reliance on sale of land to meet its principal repayments which commenced in July 2012. The negative rating outlook incorporates MARC’s view that it will be challenging for TLP to achieve sufficient near-term improvement in earnings and cash flow from its port operations to address its obligations on the sukuk in light of its unused tank terminal complex and modest utilisation of dry cargo facilities. While TLP has undertaken several initiatives to generate stronger core income, including capital dredging works to deepen the port’s draft, the port operator is expected to rely on land sales or further financial support from parent company Johor Corporation (JCorp) to meet its upcoming RM20 million repayment in July 2013 as these efforts will not be sufficient to improve overall cash flow significantly in the short-term.

Wholly-owned by JCorp and incorporated in 1995, TLP’s principal activities are the development and operations of the port of Tanjung Langsat and rental of storage tanks for petroleum and its derivatives. The port of Tanjung Langsat is a key infrastructure in the development of the adjoining Tanjung Langsat Industrial Complex (TLIC) as a petroleum and petrochemical hub to attract investors to the state of Johor. The port has a total area of 763 acres and available shorelines of 3.5 km, and serves mainly the Tanjung Langsat hinterland in handling petroleum, petrochemical products and bio-diesel.

The ramping up of TLP's commercial operations has been hampered by limitations in the port’s liquid cargo handling capacity caused by the shallow draft of the port. TLP is carrying out capital dredging works, expected to be completed by end-2012, to deepen the port’s draft and accommodate larger vessels. The dredging works were funded through a government grant of RM156 million, which evidences the economic importance of the Tanjung Langsat industrial hub. At the same time, TLP’s tank terminal complex remains unused although the tanks affected by a fire incident in August 2008 have been repaired and fully certified for operations as at end-2011. TLP is currently seeking a potential offtaker to replace the original lessee, Trafigura Pte Ltd as well as an experienced operator to manage the storage facilities. In the intervening period, TLP continues to suffer revenue losses of approximately RM0.55 million per month.

In 2011, TLP’s revenue declined to RM28.3 million (2010: RM60.4 million) as the company had depleted its unencumbered land bank for sale. Consequently, its pre-tax losses widened to RM48.1 million (2010: RM32.8 million), and this has eroded its shareholders’ funds. Although the company managed to reduce its borrowings by RM24.7 million, the losses resulted in TLP’s gearing rising to 1.75 times (2010: 1.58 times). TLP posted improved cash flow from operations (CFO) of RM92.6 million (2010: negative RM65.9 million) as proceeds from the land sales were only received in 2011, while in 1H2012, the company recorded CFO of RM34.4 million due to an increase in trade payables by RM29.6 million.

Nevertheless, some pick-up in activity at the port was observed for the first half of 2012 (1H2012), evidenced by higher revenue revenue (excluding sale of land) of RM14.3 million in 1H2012 arising from higher dockage and wharf service charges. Although the improved performance has narrowed losses at the operating level, the company’s revenue (excluding sale of land) and cash flows is expected to be insufficient to address its upcoming principal repayment in 2013. Consequently, TLP would have to rely on land sales to fund the aforementioned sukuk redemption or further financial support from JCorp to meet its upcoming redemption. TLP’s financial flexibility is viewed as limited as its remaining land assets are limited to the sale of 224.8 acres of land which have been pledged as security to the rated issuances. 

The outlook on the ratings may be revised to stable if TLP continues to show meaningful improvement in its operating performance and adequately addresses its near-term sukuk obligations through asset divestment or equity injection. Conversely, the ratings may be further lowered if the company fails to exhibit a meaningful turnaround in its financial performance. 

Contacts:         

Jason Kok, +603-2082 2258/ jason@marc.com.my

Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my

David Lee, +603-2082 2255/ david@marc.com.my.