MARC AFFIRMS ITS AA+IS RATINGS ON WESTPORTS’ SUKUK ISSUANCES

Apr 19, 2013 -

MARC has affirmed its ratings of AA+IS on both Westports Malaysia Sdn Bhd’s (Westports) sukuk issuances comprising Sukuk Musyarakah (Sukuk) Programme of up to RM2.0 billion and Sukuk Musyarakah Medium Term Notes (MTN) Programme of up to RM800 million. The outlook on both ratings is stable. The affirmed ratings take into account Westports’ competitive position as a leading port operator, strong growth in container throughput, sound financial performance and sizeable liquidity arising from its cash and bank balances. Moderating the ratings are the issuer’s susceptibility of cargo volumes to global trade trends, its rather narrow client base and MARC’s expectation of negative free cash flow generation in the near term due to its intensive capital expenditure programme and aggressive dividend policy.

Incorporated in 1990, Westports was awarded a 30-year concession by Port Klang Authority (PKA) to operate one of three terminals in Port Klang. Westports’ terminal, strategically located on Pulau Indah, Klang on the Straits of Malacca, is the second largest port in Malaysia with container and cargo handling capacity of 7.8 million twenty-foot-equivalent units (TEU) and 13.0 million metric tonnes respectively. Container handling continues to be the mainstay of Westports’ operations, accounting for 82.3% of revenue; however, its container business is dependent on global trade as 70% of its container throughput is related to transhipment activity. 

The continued expansion of Westports’ facilities since 2011 has supported container throughput to 6.9 million TEU in 2012 from 6.4 million TEU in 2011 despite the weakness in exports to western countries. As of March 2013, Westports has completed the construction of Container Terminal 6 (CT6) and the land reclamation works for CT7. Under the conditions for the extension of its port concession expiring in July 2024, the remaining land reclamation works for CT8 and CT9 must be completed on or before January 1, 2014. The total estimated cost for the land reclamation of CT8 and CT9 is projected to be RM213 million. Westports has incurred 78% of the land reclamation cost and the works are expected to be completed by September 2013. Westports is also embarking on the construction of CT7. The growth spending on Westports expansion programme will see its free cash flow negative over the next two to three years. As such, MARC expects the company to limit its expansion related outflows to capex earmarked under its expansion programme and moderate distributions to shareholders in order to maintain sufficient liquidity.

Westports’ growth in container throughput is also supported by the company’s competitive pricing relative to the Port of Singapore and strong operational efficiencies which continue to attract new liners and services to call at Westports. However, Westports’ customer base reveals significant customer concentration risk and associated credit risk with its top ten clients accounting for 82.4% of container throughput and its single biggest client CMA CGM Group (CMA CGM) accounting for 35.5% of container throughput. MARC observes that Westports’ receivables turnover remained healthy with 92.9% of its RM205.9 milllion trade receivables in the below 60 days bucket as of December 31, 2012.

Reflecting the growth in container throughput in 2012, Westports’ revenue (excluding lease asset construction costs) and operating profit rose to RM1.23 billion and RM485.0 million respectively (2011: RM1.12 billion; RM413.5 million). Consequently, cash flow from operations (CFO) increased to RM632.8 million (2011: RM493.8 million). MARC notes that the company did not draw down any additional funds from its rated programmes as it was able to fund its capex from internally generated funds. Westports’ debt-to-equity ratio declined to 0.47 times (2011: 0.60 times) after a RM100.0 million redemption of its RM800.0 million MTN Programme. Notwithstanding this, free cash flow was negative at RM13.9 million (2011: negative RM297.3 million) following dividend payouts of RM200.0 million in 2012 (2011: RM300.0 million), and cash and bank balances declined to RM325.5 million (2011: RM351.0 million). Westports intends to draw down RM500.0 million to fund its projected capex of RM712.0 million in 2013.

The stable outlook assumes that Westports will continue to maintain its competitive standing and operating margins as well as prudently manage its liquidity position. The ratings may come under pressure as a result of persistently higher-than-expected negative generation and/or debt leverage. 

  

Contacts:

Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;

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

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